At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards The Michaels Companies Inc (NASDAQ:MIK) at the end of the first quarter and determine whether the smart money was really smart about this stock.
Is The Michaels Companies Inc (NASDAQ:MIK) a good investment now? Prominent investors were reducing their bets on the stock. The number of bullish hedge fund positions retreated by 4 in recent months. Our calculations also showed that MIK isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.
Michael Burry of Scion Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's analyze the latest hedge fund action surrounding The Michaels Companies Inc (NASDAQ:MIK).
Hedge fund activity in The Michaels Companies Inc (NASDAQ:MIK)
Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the fourth quarter of 2019. By comparison, 32 hedge funds held shares or bullish call options in MIK a year ago. With hedge funds' capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
More specifically, Contrarius Investment Management was the largest shareholder of The Michaels Companies Inc (NASDAQ:MIK), with a stake worth $13.6 million reported as of the end of September. Trailing Contrarius Investment Management was Scion Asset Management, which amassed a stake valued at $5.3 million. Glenview Capital, Renaissance Technologies, and Tremblant Capital 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 Scion Asset Management allocated the biggest weight to The Michaels Companies Inc (NASDAQ:MIK), around 6.13% of its 13F portfolio. Mudrick Capital Management is also relatively very bullish on the stock, designating 2.02 percent of its 13F equity portfolio to MIK.
Judging by the fact that The Michaels Companies Inc (NASDAQ:MIK) has experienced falling interest from hedge fund managers, we can see that there exists a select few hedge funds that slashed their entire stakes heading into Q4. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dropped the largest stake of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $15.5 million in stock, and Phill Gross and Robert Atchinson's Adage Capital Management was right behind this move, as the fund dumped about $11.9 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 4 funds heading into Q4.
Let's go over hedge fund activity in other stocks similar to The Michaels Companies Inc (NASDAQ:MIK). These stocks are HEXO Corp. (NYSE:HEXO), Territorial Bancorp Inc (NASDAQ:TBNK), Motorcar Parts of America, Inc. (NASDAQ:MPAA), and Majesco (NASDAQ:MJCO). This group of stocks' market values are closest to MIK's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HEXO,7,720,1 TBNK,4,20232,0 MPAA,6,44768,1 MJCO,1,63,0 Average,4.5,16446,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $33 million in MIK's case. HEXO Corp. (NYSE:HEXO) is the most popular stock in this table. On the other hand Majesco (NASDAQ:MJCO) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks The Michaels Companies Inc (NASDAQ:MIK) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on MIK as the stock returned 336.4% in Q2 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.
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Disclosure: None. This article was originally published at Insider Monkey.