U.S. Markets closed

The Medicines Company (MDCO) vs. Hedge Fund Favorites in 2019

Debasis Saha

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about The Medicines Company (NASDAQ:MDCO)?

The Medicines Company (NASDAQ:MDCO) shareholders have witnessed a decrease in enthusiasm from smart money lately. Our calculations also showed that MDCO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 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.

[caption id="attachment_339332" align="alignnone" width="2480"] Alex Denner of Sarissa Capital Management[/caption]

Alex Denner Sarissa Capital

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 we're going to analyze the latest hedge fund action encompassing The Medicines Company (NASDAQ:MDCO).

How have hedgies been trading The Medicines Company (NASDAQ:MDCO)?

Heading into the fourth quarter of 2019, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the second quarter of 2019. On the other hand, there were a total of 26 hedge funds with a bullish position in MDCO a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MDCO A Good Stock To Buy?

Among these funds, Sarissa Capital Management held the most valuable stake in The Medicines Company (NASDAQ:MDCO), which was worth $210.1 million at the end of the third quarter. On the second spot was Maverick Capital which amassed $194.2 million worth of shares. Slate Path Capital, Iridian Asset Management, and Bridger Management 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 Sarissa Capital Management allocated the biggest weight to The Medicines Company (NASDAQ:MDCO), around 26.33% of its 13F portfolio. Antipodean Advisors is also relatively very bullish on the stock, setting aside 13.39 percent of its 13F equity portfolio to MDCO.

Because The Medicines Company (NASDAQ:MDCO) has faced declining sentiment from the aggregate hedge fund industry, it's safe to say that there was a specific group of fund managers that decided to sell off their entire stakes last quarter. Intriguingly, Stephen DuBois's Camber Capital Management sold off the largest position of the "upper crust" of funds followed by Insider Monkey, valued at about $62 million in stock. Albert Cha and Frank Kung's fund, Vivo Capital, also sold off its stock, about $24.4 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as The Medicines Company (NASDAQ:MDCO) but similarly valued. We will take a look at Helen of Troy Limited (NASDAQ:HELE), Repligen Corporation (NASDAQ:RGEN), FirstCash, Inc. (NASDAQ:FCFS), and Mattel, Inc. (NASDAQ:MAT). All of these stocks' market caps are similar to MDCO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HELE,14,206819,-6 RGEN,23,223018,1 FCFS,16,179303,1 MAT,22,685143,6 Average,18.75,323571,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $324 million. That figure was $1150 million in MDCO's case. Repligen Corporation (NASDAQ:RGEN) is the most popular stock in this table. On the other hand Helen of Troy Limited (NASDAQ:HELE) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks The Medicines Company (NASDAQ:MDCO) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on MDCO as the stock returned 342.4% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content