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Medallia, Inc. (MDLA): Hedge Funds Are Taking Some Chips Off The Table

Asma UL Husna
·7 min read

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Medallia, Inc. (NYSE:MDLA) and determine whether hedge funds skillfully traded this stock.

Is Medallia, Inc. (NYSE:MDLA) worth your attention right now? Hedge funds were getting less optimistic. The number of bullish hedge fund bets were cut by 2 in recent months. Medallia, Inc. (NYSE:MDLA) was in 18 hedge funds' portfolios at the end of June. The all time high for this statistics is 23. Our calculations also showed that MDLA isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Robert Moses RGM Capital
Robert Moses RGM Capital

Robert G. Moses of RGM Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's take a peek at the recent hedge fund action surrounding Medallia, Inc. (NYSE:MDLA).

What have hedge funds been doing with Medallia, Inc. (NYSE:MDLA)?

Heading into the third quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MDLA over the last 20 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, SCGE Management, managed by Christopher Lyle, holds the largest position in Medallia, Inc. (NYSE:MDLA). SCGE Management has a $103.5 million position in the stock, comprising 2% of its 13F portfolio. Sitting at the No. 2 spot is Platinum Asset Management, managed by Kerr Neilson, which holds a $51 million position; 1.2% of its 13F portfolio is allocated to the company. Remaining professional money managers that are bullish consist of Brian Ashford-Russell and Tim Woolley's Polar Capital, Robert G. Moses's RGM Capital and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position SCGE Management allocated the biggest weight to Medallia, Inc. (NYSE:MDLA), around 2% of its 13F portfolio. Potrero Capital Research is also relatively very bullish on the stock, earmarking 1.95 percent of its 13F equity portfolio to MDLA.

Since Medallia, Inc. (NYSE:MDLA) has faced falling interest from hedge fund managers, logic holds that there lies a certain "tier" of funds that slashed their entire stakes in the second quarter. At the top of the heap, Lone Pine Capital cut the biggest investment of the "upper crust" of funds tracked by Insider Monkey, totaling about $37.1 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also sold off its stock, about $6.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds in the second quarter.

Let's also examine hedge fund activity in other stocks similar to Medallia, Inc. (NYSE:MDLA). We will take a look at Black Hills Corporation (NYSE:BKH), Braskem SA (NYSE:BAK), Physicians Realty Trust (NYSE:DOC), Hamilton Lane Incorporated (NASDAQ:HLNE), Agree Realty Corporation (NYSE:ADC), Regal Beloit Corporation (NYSE:RBC), and Power Integrations Inc (NASDAQ:POWI). This group of stocks' market values are similar to MDLA's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BKH,22,182307,4 BAK,7,36296,1 DOC,15,106429,-1 HLNE,19,118594,10 ADC,16,300188,-5 RBC,22,258249,3 POWI,17,89358,-4 Average,16.9,155917,1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.9 hedge funds with bullish positions and the average amount invested in these stocks was $156 million. That figure was $258 million in MDLA's case. Black Hills Corporation (NYSE:BKH) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 7 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 overall hedge fund sentiment score for MDLA is 63.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately MDLA wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MDLA were disappointed as the stock returned 8.6% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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Disclosure: None. This article was originally published at Insider Monkey.

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