Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Macatawa Bank Corporation (NASDAQ:MCBC) going to take off soon? Prominent investors are betting on the stock. The number of bullish hedge fund bets went up by 2 recently. Our calculations also showed that MCBC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). MCBC was in 7 hedge funds' portfolios at the end of September. There were 5 hedge funds in our database with MCBC positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_728717" align="aligncenter" width="1613"] Roger Ibbotson of Zebra Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's take a glance at the new hedge fund action encompassing Macatawa Bank Corporation (NASDAQ:MCBC).
How have hedgies been trading Macatawa Bank Corporation (NASDAQ:MCBC)?
At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 40% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MCBC over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Macatawa Bank Corporation (NASDAQ:MCBC) was held by Elizabeth Park Capital Management, which reported holding $13 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $12 million position. Other investors bullish on the company included Winton Capital Management, Two Sigma Advisors, and Zebra Capital Management. In terms of the portfolio weights assigned to each position Elizabeth Park Capital Management allocated the biggest weight to Macatawa Bank Corporation (NASDAQ:MCBC), around 5.12% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, designating 0.21 percent of its 13F equity portfolio to MCBC.
With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Winton Capital Management, managed by David Harding, assembled the most valuable position in Macatawa Bank Corporation (NASDAQ:MCBC). Winton Capital Management had $0.5 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also made a $0.1 million investment in the stock during the quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Macatawa Bank Corporation (NASDAQ:MCBC) but similarly valued. We will take a look at Agenus Inc (NASDAQ:AGEN), Calix Inc (NYSE:CALX), Health Insurance Innovations Inc (NASDAQ:HIIQ), and DURECT Corporation (NASDAQ:DRRX). All of these stocks' market caps are closest to MCBC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGEN,8,7665,2 CALX,14,82824,0 HIIQ,15,90739,-4 DRRX,9,44901,4 Average,11.5,56532,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $57 million. That figure was $26 million in MCBC's case. Health Insurance Innovations Inc (NASDAQ:HIIQ) is the most popular stock in this table. On the other hand Agenus Inc (NASDAQ:AGEN) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Macatawa Bank Corporation (NASDAQ:MCBC) is even less popular than AGEN. Hedge funds dodged a bullet by taking a bearish stance towards MCBC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MCBC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MCBC investors were disappointed as the stock returned 3.7% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.