Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Medifast, Inc. (NYSE:MED).
Is Medifast, Inc. (NYSE:MED) a healthy stock for your portfolio? Money managers are in an optimistic mood. The number of long hedge fund bets moved up by 6 recently. Our calculations also showed that med isn't among the 30 most popular stocks among hedge funds. MED was in 28 hedge funds' portfolios at the end of March. There were 22 hedge funds in our database with MED holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]
We're going to check out the recent hedge fund action encompassing Medifast, Inc. (NYSE:MED).
How have hedgies been trading Medifast, Inc. (NYSE:MED)?
At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 27% from the previous quarter. On the other hand, there were a total of 16 hedge funds with a bullish position in MED a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Medifast, Inc. (NYSE:MED) was held by Renaissance Technologies, which reported holding $108.5 million worth of stock at the end of March. It was followed by Hoplite Capital Management with a $33.5 million position. Other investors bullish on the company included Arrowstreet Capital, Millennium Management, and AQR Capital Management.
Consequently, some big names have jumped into Medifast, Inc. (NYSE:MED) headfirst. Hoplite Capital Management, managed by John Lykouretzos, established the most outsized position in Medifast, Inc. (NYSE:MED). Hoplite Capital Management had $33.5 million invested in the company at the end of the quarter. Philip Hempleman's Ardsley Partners also made a $10.2 million investment in the stock during the quarter. The following funds were also among the new MED investors: Glenn W. Welling's Engaged Capital, Matthew Hulsizer's PEAK6 Capital Management, and Paul Tudor Jones's Tudor Investment Corp.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Medifast, Inc. (NYSE:MED) but similarly valued. These stocks are SPX Corporation (NYSE:SPXC), BrightView Holdings, Inc. (NYSE:BV), STAAR Surgical Company (NASDAQ:STAA), and Callaway Golf Company (NYSE:ELY). This group of stocks' market values are similar to MED's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPXC,19,111377,4 BV,9,225251,-1 STAA,21,611663,1 ELY,26,145044,3 Average,18.75,273334,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $273 million. That figure was $311 million in MED's case. Callaway Golf Company (NYSE:ELY) is the most popular stock in this table. On the other hand BrightView Holdings, Inc. (NYSE:BV) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Medifast, Inc. (NYSE:MED) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on MED as the stock returned 3.9% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.