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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 MEI Pharma Inc (NASDAQ:MEIP).
Is MEIP a good stock to buy now? The smart money was getting less optimistic. The number of bullish hedge fund positions were trimmed by 4 in recent months. MEI Pharma Inc (NASDAQ:MEIP) was in 16 hedge funds' portfolios at the end of September. The all time high for this statistic is 20. Our calculations also showed that MEIP isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 20 hedge funds in our database with MEIP positions at the end of the second quarter.
Video: 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 S&P 500 ETFs by more than 66 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. 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.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Now let's take a peek at the fresh hedge fund action encompassing MEI Pharma Inc (NASDAQ:MEIP).
Do Hedge Funds Think MEIP Is A Good Stock To Buy Now?
At third quarter's end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the previous quarter. By comparison, 13 hedge funds held shares or bullish call options in MEIP a year ago. With hedgies' sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, Biotechnology Value Fund / BVF Inc was the largest shareholder of MEI Pharma Inc (NASDAQ:MEIP), with a stake worth $12.7 million reported as of the end of September. Trailing Biotechnology Value Fund / BVF Inc was Renaissance Technologies, which amassed a stake valued at $9.8 million. Burrage Capital Management, Citadel Investment Group, and Opaleye 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 Burrage Capital Management allocated the biggest weight to MEI Pharma Inc (NASDAQ:MEIP), around 7.49% of its 13F portfolio. Opaleye Management is also relatively very bullish on the stock, dishing out 0.95 percent of its 13F equity portfolio to MEIP.
Judging by the fact that MEI Pharma Inc (NASDAQ:MEIP) has witnessed bearish sentiment from hedge fund managers, we can see that there was a specific group of fund managers who sold off their entire stakes by the end of the third quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP cut the biggest investment of the 750 funds tracked by Insider Monkey, comprising close to $2.2 million in stock, and Doron Breen and Mori Arkin's Sphera Global Healthcare Fund was right behind this move, as the fund dropped about $1.7 million worth. These moves are interesting, as total hedge fund interest fell by 4 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as MEI Pharma Inc (NASDAQ:MEIP) but similarly valued. These stocks are AC Immune SA (NASDAQ:ACIU), MBIA Inc. (NYSE:MBI), Oceaneering International (NYSE:OII), Miller Industries, Inc. (NYSE:MLR), Merus N.V. (NASDAQ:MRUS), Franks International NV (NYSE:FI), and Prevail Therapeutics Inc. (NASDAQ:PRVL). This group of stocks' market valuations are closest to MEIP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ACIU,11,61021,1 MBI,16,65059,0 OII,18,30144,1 MLR,11,55092,1 MRUS,13,120093,-2 FI,9,5350,0 PRVL,12,205610,1 Average,12.9,77481,0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.9 hedge funds with bullish positions and the average amount invested in these stocks was $77 million. That figure was $59 million in MEIP's case. Oceaneering International (NYSE:OII) is the most popular stock in this table. On the other hand Franks International NV (NYSE:FI) is the least popular one with only 9 bullish hedge fund positions. MEI Pharma Inc (NASDAQ:MEIP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MEIP is 63.9. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately MEIP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MEIP were disappointed as the stock returned -7.1% since the end of September (through 12/14) 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.
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Disclosure: None. This article was originally published at Insider Monkey.