Micro Focus Intl PLC (MFGP): Are Hedge Funds Right About This Stock?
"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Micro Focus Intl PLC (NYSE:MFGP) in order to identify whether reputable and successful top money managers continue to believe in its potential.
Hedge fund interest in Micro Focus Intl PLC (NYSE:MFGP) 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 MFGP to other stocks including H&R Block, Inc. (NYSE:HRB), Tetra Tech, Inc. (NASDAQ:TTEK), and The New York Times Company (NYSE:NYT) to get a better sense of its popularity.
Video: Click the image to 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 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.
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Ken Griffin of Citadel Investment Group[/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. Now let's check out the latest hedge fund action surrounding Micro Focus Intl PLC (NYSE:MFGP).
What does smart money think about Micro Focus Intl PLC (NYSE:MFGP)?
At Q3's end, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MFGP over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital has the most valuable position in Micro Focus Intl PLC (NYSE:MFGP), worth close to $17.2 million, corresponding to less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Marshall Wace, managed by Paul Marshall and Ian Wace, which holds a $3.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish consist of John Overdeck and David Siegel's Two Sigma Advisors, Ken Griffin's Citadel Investment Group and Dmitry Balyasny's Balyasny Asset Management. In terms of the portfolio weights assigned to each position Arrowstreet Capital allocated the biggest weight to Micro Focus Intl PLC (NYSE:MFGP), around 0.04% of its 13F portfolio. Marshall Wace is also relatively very bullish on the stock, earmarking 0.02 percent of its 13F equity portfolio to MFGP.
Judging by the fact that Micro Focus Intl PLC (NYSE:MFGP) has witnessed declining sentiment from the smart money, we can see that there were a few fund managers who were dropping their positions entirely heading into Q4. Interestingly, Phil Frohlich's Prescott Group Capital Management dropped the largest stake of the 750 funds monitored by Insider Monkey, worth an estimated $3 million in call options. Matthew Hulsizer's fund, PEAK6 Capital Management, also dropped its call options, about $1.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate 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 Micro Focus Intl PLC (NYSE:MFGP). We will take a look at H&R Block, Inc. (NYSE:HRB), Tetra Tech, Inc. (NASDAQ:TTEK), The New York Times Company (NYSE:NYT), and Nexstar Media Group, Inc. (NASDAQ:NXST). This group of stocks' market values are similar to MFGP's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HRB,21,321850,-4 TTEK,21,123653,-1 NYT,37,1186018,-4 NXST,34,1329838,-6 Average,28.25,740340,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $740 million. That figure was $21 million in MFGP's case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand H&R Block, Inc. (NYSE:HRB) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Micro Focus Intl PLC (NYSE:MFGP) is even less popular than HRB. Hedge funds dodged a bullet by taking a bearish stance towards MFGP. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MFGP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MFGP investors were disappointed as the stock returned 3.7% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
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