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Were Hedge Funds Right About Betting On MGM Resorts International (MGM)?

Abigail Fisher

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of MGM Resorts International (NYSE:MGM).

Is MGM Resorts International (NYSE:MGM) a buy right now? Hedge funds are in an optimistic mood. The number of bullish hedge fund bets increased by 13 lately. Our calculations also showed that MGM isn't among the 30 most popular stocks among hedge funds.

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_260193" align="aligncenter" width="450"] Keith Meister of Corvex Capital[/caption]

Keith Meister of Corvex Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let's view the latest hedge fund action regarding MGM Resorts International (NYSE:MGM).

How have hedgies been trading MGM Resorts International (NYSE:MGM)?

Heading into the fourth quarter of 2019, a total of 48 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 37% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MGM 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.

MGM_nov2019

More specifically, Corvex Capital was the largest shareholder of MGM Resorts International (NYSE:MGM), with a stake worth $570 million reported as of the end of September. Trailing Corvex Capital was Canyon Capital Advisors, which amassed a stake valued at $313.8 million. Point72 Asset Management, Two Sigma Advisors, and Blue Harbour Group 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 Corvex Capital allocated the biggest weight to MGM Resorts International (NYSE:MGM), around 28.25% of its portfolio. Land & Buildings Investment Management is also relatively very bullish on the stock, designating 9.19 percent of its 13F equity portfolio to MGM.

With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Point72 Asset Management, managed by Steve Cohen, initiated the biggest position in MGM Resorts International (NYSE:MGM). Point72 Asset Management had $171.2 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $47.2 million investment in the stock during the quarter. The other funds with brand new MGM positions are Steve Cohen's Point72 Asset Management, Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital, and Jeffrey Talpins's Element Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as MGM Resorts International (NYSE:MGM) but similarly valued. We will take a look at ArcelorMittal (NYSE:MT), Quest Diagnostics Incorporated (NYSE:DGX), SK Telecom Co., Ltd. (NYSE:SKM), and Pinterest, Inc. (NYSE:PINS). This group of stocks' market caps resemble MGM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MT,14,192839,-1 DGX,33,561377,9 SKM,6,42756,-1 PINS,31,980235,0 Average,21,444302,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $444 million. That figure was $2194 million in MGM's case. Quest Diagnostics Incorporated (NYSE:DGX) is the most popular stock in this table. On the other hand SK Telecom Co., Ltd. (NYSE:SKM) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks MGM Resorts International (NYSE:MGM) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Hedge funds were also right about betting on MGM as the stock returned 15.2% during Q4 (through 11/22) 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.

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

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