Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don't publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That's why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Magenta Therapeutics, Inc. (NASDAQ:MGTA) from the perspective of those elite funds.
Magenta Therapeutics, Inc. (NASDAQ:MGTA) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds' portfolios at the end of June. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Casa Systems, Inc. (NASDAQ:CASA), National CineMedia, Inc. (NASDAQ:NCMI), and Gamco Investors Inc. (NYSE:GBL) to gather more data points. Our calculations also showed that MGTA isn't among the 30 most popular stocks among hedge funds (see the video below). 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 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the fresh hedge fund action encompassing Magenta Therapeutics, Inc. (NASDAQ:MGTA).
Hedge fund activity in Magenta Therapeutics, Inc. (NASDAQ:MGTA)
At the end of the second quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the first quarter of 2019. On the other hand, there were a total of 14 hedge funds with a bullish position in MGTA a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
Among these funds, Casdin Capital held the most valuable stake in Magenta Therapeutics, Inc. (NASDAQ:MGTA), which was worth $44.3 million at the end of the second quarter. On the second spot was Opaleye Management which amassed $7.9 million worth of shares. Moreover, Alkeon Capital Management, Harvard Management Co, and Citadel Investment Group were also bullish on Magenta Therapeutics, Inc. (NASDAQ:MGTA), allocating a large percentage of their portfolios to this stock.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: EcoR1 Capital. 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Alkeon Capital Management).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Magenta Therapeutics, Inc. (NASDAQ:MGTA) but similarly valued. We will take a look at Casa Systems, Inc. (NASDAQ:CASA), National CineMedia, Inc. (NASDAQ:NCMI), Gamco Investors Inc. (NYSE:GBL), and FRP Holdings Inc (NASDAQ:FRPH). This group of stocks' market values resemble MGTA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CASA,13,20586,-6 NCMI,16,39601,-2 GBL,10,10355,1 FRPH,7,46456,-1 Average,11.5,29250,-2 [/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 $29 million. That figure was $72 million in MGTA's case. National CineMedia, Inc. (NASDAQ:NCMI) is the most popular stock in this table. On the other hand FRP Holdings Inc (NASDAQ:FRPH) is the least popular one with only 7 bullish hedge fund positions. Magenta Therapeutics, Inc. (NASDAQ:MGTA) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MGTA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MGTA investors were disappointed as the stock returned -30.4% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.