Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 9.9 percentage points through the end of November. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Medallia, Inc. (NYSE:MDLA) was in 23 hedge funds' portfolios at the end of September. MDLA shareholders have witnessed an increase in support from the world's most elite money managers in recent months. There were 0 hedge funds in our database with MDLA holdings at the end of the previous quarter. Our calculations also showed that MDLA isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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_769366" align="aligncenter" width="1613"] Robert Moses of RGM Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a peek at the key hedge fund action regarding Medallia, Inc. (NYSE:MDLA).
What have hedge funds been doing with Medallia, Inc. (NYSE:MDLA)?
At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 23 from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MDLA over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, SCGE Management was the largest shareholder of Medallia, Inc. (NYSE:MDLA), with a stake worth $112.4 million reported as of the end of September. Trailing SCGE Management was RGM Capital, which amassed a stake valued at $75 million. Lone Pine Capital, Citadel Investment Group, and Ratan Capital Group 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 SCGE Management allocated the biggest weight to Medallia, Inc. (NYSE:MDLA), around 5.68% of its 13F portfolio. RGM Capital is also relatively very bullish on the stock, designating 4.99 percent of its 13F equity portfolio to MDLA.
Consequently, key money managers have been driving this bullishness. SCGE Management, managed by Christopher Lyle, assembled the most outsized position in Medallia, Inc. (NYSE:MDLA). SCGE Management had $112.4 million invested in the company at the end of the quarter. Robert G. Moses's RGM Capital also initiated a $75 million position during the quarter. The other funds with brand new MDLA positions are Lone Pine Capital, Ken Griffin's Citadel Investment Group, and Nehal Chopra's Ratan Capital Group.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Medallia, Inc. (NYSE:MDLA) but similarly valued. These stocks are Bank of Hawaii Corporation (NYSE:BOH), MorphoSys AG (NASDAQ:MOR), KBR, Inc. (NYSE:KBR), and Cosan Limited (NYSE:CZZ). All of these stocks' market caps match MDLA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BOH,13,104848,1 MOR,4,6546,-2 KBR,29,540631,7 CZZ,15,198653,0 Average,15.25,212670,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $251 million in MDLA's case. KBR, Inc. (NYSE:KBR) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 4 bullish hedge fund positions. Medallia, Inc. (NYSE:MDLA) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on MDLA as the stock returned 10.7% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.