How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Moelis & Company (NYSE:MC) and determine whether hedge funds had an edge regarding this stock.
Moelis & Company (NYSE:MC) investors should pay attention to a decrease in activity from the world's largest hedge funds lately. Our calculations also showed that MC isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_193003" align="aligncenter" width="400"] Chuck Royce of Royce & Associates[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's take a glance at the recent hedge fund action encompassing Moelis & Company (NYSE:MC).
How are hedge funds trading Moelis & Company (NYSE:MC)?
At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MC over the last 18 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in Moelis & Company (NYSE:MC), which was worth $23.4 million at the end of the third quarter. On the second spot was GLG Partners which amassed $3.3 million worth of shares. Schonfeld Strategic Advisors, Millennium Management, and Holocene Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Moelis & Company (NYSE:MC), around 0.32% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, earmarking 0.21 percent of its 13F equity portfolio to MC.
Because Moelis & Company (NYSE:MC) has experienced a decline in interest from hedge fund managers, it's easy to see that there lies a certain "tier" of funds that decided to sell off their full holdings last quarter. Intriguingly, William Heard's Heard Capital sold off the biggest position of all the hedgies watched by Insider Monkey, valued at an estimated $4.4 million in stock, and John Overdeck and David Siegel's Two Sigma Advisors was right behind this move, as the fund said goodbye to about $4.1 million worth. These transactions are important to note, as total hedge fund interest was cut by 3 funds last quarter.
Let's check out hedge fund activity in other stocks similar to Moelis & Company (NYSE:MC). We will take a look at Penn National Gaming, Inc (NASDAQ:PENN), Cabot Corporation (NYSE:CBT), Insight Enterprises, Inc. (NASDAQ:NSIT), and Holly Energy Partners, L.P. (NYSE:HEP). All of these stocks' market caps resemble MC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PENN,18,73094,-9 CBT,23,58355,-6 NSIT,13,65128,-5 HEP,6,6214,1 Average,15,50698,-4.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $51 million. That figure was $37 million in MC's case. Cabot Corporation (NYSE:CBT) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 6 bullish hedge fund positions. Moelis & Company (NYSE:MC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately MC wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MC investors were disappointed as the stock returned 11.8% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.