Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards MannKind Corporation (NASDAQ:MNKD).
MannKind Corporation (NASDAQ:MNKD) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds' portfolios at the end of the third quarter of 2019. 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 RGC Resources, Inc. (NASDAQ:RGCO), U.S. Xpress Enterprises, Inc. (NYSE:USX), and Evofem Biosciences, Inc. (NASDAQ:EVFM) to gather more data points. Our calculations also showed that MNKD 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_365194" align="alignnone" width="600"] David E. Shaw of D.E. Shaw[/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 look at the recent hedge fund action regarding MannKind Corporation (NASDAQ:MNKD).
What have hedge funds been doing with MannKind Corporation (NASDAQ:MNKD)?
Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MNKD over the last 17 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
More specifically, Raging Capital Management was the largest shareholder of MannKind Corporation (NASDAQ:MNKD), with a stake worth $3.8 million reported as of the end of September. Trailing Raging Capital Management was D E Shaw, which amassed a stake valued at $1.6 million. Scopia Capital, Citadel Investment Group, and HighVista Strategies 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 Raging Capital Management allocated the biggest weight to MannKind Corporation (NASDAQ:MNKD), around 0.61% of its 13F portfolio. Scopia Capital is also relatively very bullish on the stock, setting aside 0.07 percent of its 13F equity portfolio to MNKD.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Two Sigma Advisors. 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 HighVista Strategies).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as MannKind Corporation (NASDAQ:MNKD) but similarly valued. These stocks are RGC Resources, Inc. (NASDAQ:RGCO), U.S. Xpress Enterprises, Inc. (NYSE:USX), Evofem Biosciences, Inc. (NASDAQ:EVFM), and FS Bancorp, Inc. (NASDAQ:FSBW). This group of stocks' market caps resemble MNKD's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RGCO,1,804,0 USX,10,19479,2 EVFM,4,63652,3 FSBW,5,19145,-2 Average,5,25770,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $7 million in MNKD's case. U.S. Xpress Enterprises, Inc. (NYSE:USX) is the most popular stock in this table. On the other hand RGC Resources, Inc. (NASDAQ:RGCO) is the least popular one with only 1 bullish hedge fund positions. MannKind Corporation (NASDAQ:MNKD) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 MNKD wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MNKD were disappointed as the stock returned -1.6% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.