Is Merrimack Pharmaceuticals Inc (NASDAQ:MACK) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Is Merrimack Pharmaceuticals Inc (NASDAQ:MACK) an attractive investment now? Prominent investors are becoming less confident. The number of long hedge fund bets were trimmed by 1 lately. Our calculations also showed that MACK isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). MACK was in 4 hedge funds' portfolios at the end of September. There were 5 hedge funds in our database with MACK 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.
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 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 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 stocks that are in our short portfolio.
[caption id="attachment_258236" align="alignnone" width="600"] Ken Griffin of Citadel Investment Group[/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. With all of this in mind let's take a peek at the latest hedge fund action encompassing Merrimack Pharmaceuticals Inc (NASDAQ:MACK).
What have hedge funds been doing with Merrimack Pharmaceuticals Inc (NASDAQ:MACK)?
At the end of the third quarter, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MACK over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Noah Levy and Eugene Dozortsev's Newtyn Management has the largest position in Merrimack Pharmaceuticals Inc (NASDAQ:MACK), worth close to $5.3 million, corresponding to 0.5% of its total 13F portfolio. The second most bullish fund manager is Nantahala Capital Management, led by Wilmot B. Harkey and Daniel Mack, holding a $3.4 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions encompass Ken Griffin's Citadel Investment Group, Gavin Saitowitz and Cisco J. del Valle's Springbok Capital and . In terms of the portfolio weights assigned to each position Newtyn Management allocated the biggest weight to Merrimack Pharmaceuticals Inc (NASDAQ:MACK), around 0.5% of its 13F portfolio. Nantahala Capital Management is also relatively very bullish on the stock, setting aside 0.12 percent of its 13F equity portfolio to MACK.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: D E Shaw. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified MACK as a viable investment and initiated a position in the stock.
Let's check out hedge fund activity in other stocks similar to Merrimack Pharmaceuticals Inc (NASDAQ:MACK). These stocks are Greenland Acquisition Corporation (NASDAQ:GLAC), Zovio Inc. (NASDAQ:ZVO), Fellazo Inc. (NASDAQ:FLLC), and Tecogen Inc. (NASDAQ:TGEN). This group of stocks' market valuations resemble MACK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GLAC,6,6869,0 ZVO,13,15399,3 FLLC,5,14615,5 TGEN,2,136,0 Average,6.5,9255,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $9 million in MACK's case. Zovio Inc. (NASDAQ:ZVO) is the most popular stock in this table. On the other hand Tecogen Inc. (NASDAQ:TGEN) is the least popular one with only 2 bullish hedge fund positions. Merrimack Pharmaceuticals Inc (NASDAQ:MACK) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MACK wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MACK investors were disappointed as the stock returned -19.6% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.