Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Midland States Bancorp, Inc. (NASDAQ:MSBI) was in 7 hedge funds' portfolios at the end of September. MSBI has experienced an increase in support from the world's most elite money managers of late. There were 6 hedge funds in our database with MSBI holdings at the end of the previous quarter. Our calculations also showed that MSBI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 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. 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.
[caption id="attachment_189632" align="aligncenter" width="600"] David Harding of Winton Capital Management[/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. With all of this in mind let's go over the fresh hedge fund action surrounding Midland States Bancorp, Inc. (NASDAQ:MSBI).
What have hedge funds been doing with Midland States Bancorp, Inc. (NASDAQ:MSBI)?
At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from one quarter earlier. On the other hand, there were a total of 4 hedge funds with a bullish position in MSBI a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Midland States Bancorp, Inc. (NASDAQ:MSBI), with a stake worth $2.1 million reported as of the end of September. Trailing Renaissance Technologies was Winton Capital Management, which amassed a stake valued at $1.2 million. Citadel Investment Group, Ancora Advisors, and Millennium 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 Zebra Capital Management allocated the biggest weight to Midland States Bancorp, Inc. (NASDAQ:MSBI), around 0.42% of its 13F portfolio. Ancora Advisors is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to MSBI.
As industrywide interest jumped, some big names were breaking ground themselves. Winton Capital Management, managed by David Harding, initiated the most valuable position in Midland States Bancorp, Inc. (NASDAQ:MSBI). Winton Capital Management had $1.2 million invested in the company at the end of the quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Midland States Bancorp, Inc. (NASDAQ:MSBI) but similarly valued. We will take a look at Sabine Royalty Trust (NYSE:SBR), Fossil Group Inc (NASDAQ:FOSL), Tidewater Inc. (NYSE:TDW), and Malibu Boats Inc (NASDAQ:MBUU). This group of stocks' market caps match MSBI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBR,6,22874,-1 FOSL,18,77372,5 TDW,17,145340,2 MBUU,20,81462,3 Average,15.25,81762,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $6 million in MSBI's case. Malibu Boats Inc (NASDAQ:MBUU) is the most popular stock in this table. On the other hand Sabine Royalty Trust (NYSE:SBR) is the least popular one with only 6 bullish hedge fund positions. Midland States Bancorp, Inc. (NASDAQ:MSBI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on MSBI, though not to the same extent, as the stock returned 8.7% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.