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Were Hedge Funds Right About Cashing Out Of Malibu Boats Inc (MBUU)?

Asma UL Husna

Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Malibu Boats Inc (NASDAQ:MBUU).

Malibu Boats Inc (NASDAQ:MBUU) shareholders have witnessed a decrease in hedge fund sentiment lately. Our calculations also showed that MBUU isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

MBUU_oct2019

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 analyze the recent hedge fund action encompassing Malibu Boats Inc (NASDAQ:MBUU).

How are hedge funds trading Malibu Boats Inc (NASDAQ:MBUU)?

Heading into the third quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in MBUU a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

John Overdeck of Two Sigma

The largest stake in Malibu Boats Inc (NASDAQ:MBUU) was held by Renaissance Technologies, which reported holding $42.5 million worth of stock at the end of March. It was followed by Millennium Management with a $23.8 million position. Other investors bullish on the company included Shellback Capital, Citadel Investment Group, and Two Sigma Advisors.

Since Malibu Boats Inc (NASDAQ:MBUU) has experienced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there exists a select few fund managers who sold off their entire stakes last quarter. Interestingly, Paul Marshall and Ian Wace's Marshall Wace LLP dumped the largest position of the 750 funds tracked by Insider Monkey, totaling about $3.5 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dropped its stock, about $1 million worth. These moves are interesting, as total hedge fund interest dropped by 1 funds last quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Malibu Boats Inc (NASDAQ:MBUU) but similarly valued. We will take a look at Emerald Expositions Events, Inc. (NYSE:EEX), Golar LNG Partners LP (NASDAQ:GMLP), Systemax Inc. (NYSE:SYX), and Origin Bancorp, Inc. (NASDAQ:OBNK). This group of stocks' market valuations match MBUU's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EEX,7,4514,1 GMLP,6,36301,2 SYX,11,20269,-1 OBNK,4,25069,0 Average,7,21538,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $103 million in MBUU's case. Systemax Inc. (NYSE:SYX) is the most popular stock in this table. On the other hand Origin Bancorp, Inc. (NASDAQ:OBNK) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Malibu Boats Inc (NASDAQ:MBUU) is more popular among hedge funds. 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 MBUU wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MBUU were disappointed as the stock returned -21% 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 in Q3.

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

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