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Were Hedge Funds Right About Buying Mednax Inc. (MD)?

Nina Todic

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.

Mednax Inc. (NYSE:MD) was in 19 hedge funds' portfolios at the end of September. MD shareholders have witnessed an increase in support from the world's most elite money managers in recent months. There were 18 hedge funds in our database with MD holdings at the end of the previous quarter. Our calculations also showed that MD 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.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? 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_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/caption]

David Harding

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. Keeping this in mind let's take a gander at the fresh hedge fund action regarding Mednax Inc. (NYSE:MD).

Hedge fund activity in Mednax Inc. (NYSE:MD)

At Q3's end, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the second quarter of 2019. On the other hand, there were a total of 25 hedge funds with a bullish position in MD a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Mednax Inc. (NYSE:MD) was held by D E Shaw, which reported holding $81.1 million worth of stock at the end of September. It was followed by P2 Capital Partners with a $62.2 million position. Other investors bullish on the company included AQR Capital Management, Winton Capital Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position P2 Capital Partners allocated the biggest weight to Mednax Inc. (NYSE:MD), around 4.2% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, setting aside 0.54 percent of its 13F equity portfolio to MD.

Consequently, specific money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the biggest position in Mednax Inc. (NYSE:MD). Arrowstreet Capital had $4.7 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also initiated a $1 million position during the quarter. The other funds with brand new MD positions are Hoon Kim's Quantinno Capital, Benjamin A. Smith's Laurion Capital Management, and Chuck Royce's Royce & Associates.

Let's go over hedge fund activity in other stocks similar to Mednax Inc. (NYSE:MD). We will take a look at BGC Partners, Inc. (NASDAQ:BGCP), Scientific Games Corporation (NASDAQ:SGMS), Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), and AssetMark Financial Holdings, Inc. (NYSE:AMK). This group of stocks' market values match MD's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BGCP,21,270227,-4 SGMS,25,575551,-2 LGND,20,371572,1 AMK,10,44658,10 Average,19,315502,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $316 million. That figure was $266 million in MD's case. Scientific Games Corporation (NASDAQ:SGMS) is the most popular stock in this table. On the other hand AssetMark Financial Holdings, Inc. (NYSE:AMK) is the least popular one with only 10 bullish hedge fund positions. Mednax Inc. (NYSE:MD) 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 MD as the stock returned 15.5% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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