Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Merit Medical Systems, Inc. (NASDAQ:MMSI).
Hedge fund interest in Merit Medical Systems, Inc. (NASDAQ:MMSI) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare MMSI to other stocks including Balchem Corporation (NASDAQ:BCPC), Allegheny Technologies Incorporated (NYSE:ATI), and Fox Factory Holding Corp (NASDAQ:FOXF) to get a better sense of its popularity. Our calculations also showed that MMSI isn't among the 30 most popular stocks among hedge funds (view 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 glance at the fresh hedge fund action regarding Merit Medical Systems, Inc. (NASDAQ:MMSI).
How have hedgies been trading Merit Medical Systems, Inc. (NASDAQ:MMSI)?
At Q2's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MMSI over the last 16 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in Merit Medical Systems, Inc. (NASDAQ:MMSI) was held by Perceptive Advisors, which reported holding $48.7 million worth of stock at the end of March. It was followed by Citadel Investment Group with a $42.4 million position. Other investors bullish on the company included Millennium Management, Partner Fund Management, and Fisher Asset Management.
Seeing as Merit Medical Systems, Inc. (NASDAQ:MMSI) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of funds that decided to sell off their entire stakes last quarter. Intriguingly, Israel Englander's Millennium Management cut the largest investment of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $1.2 million in call options, and Matthew Hulsizer's PEAK6 Capital Management was right behind this move, as the fund cut about $1 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Merit Medical Systems, Inc. (NASDAQ:MMSI). These stocks are Balchem Corporation (NASDAQ:BCPC), Allegheny Technologies Incorporated (NYSE:ATI), Fox Factory Holding Corp (NASDAQ:FOXF), and The Descartes Systems Group Inc (NASDAQ:DSGX). This group of stocks' market caps are closest to MMSI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BCPC,9,64157,2 ATI,21,341152,-4 FOXF,11,28084,-3 DSGX,11,121216,1 Average,13,138652,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $237 million in MMSI's case. Allegheny Technologies Incorporated (NYSE:ATI) is the most popular stock in this table. On the other hand Balchem Corporation (NASDAQ:BCPC) is the least popular one with only 9 bullish hedge fund positions. Merit Medical Systems, Inc. (NASDAQ:MMSI) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MMSI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MMSI were disappointed as the stock returned -48.9% 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 this year.
Disclosure: None. This article was originally published at Insider Monkey.