Did Hedge Funds Drop The Ball On Mallinckrodt plc (MNK) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing more than 750 13F filings submitted by hedge funds and prominent investors. These filings show these funds’ portfolio positions as of September 30th, 2019. In this article we are going to take a look at smart money sentiment towards Mallinckrodt plc (NYSE:MNK).

Hedge fund interest in Mallinckrodt plc (NYSE:MNK) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Smith Micro Software, Inc. (NASDAQ:SMSI), GSI Technology, Inc. (NASDAQ:GSIT), and Arlington Asset Investment Corp (NYSE:AI) to gather more data points. Our calculations also showed that MNK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Bill Miller

Bill Miller of Miller Value Partners

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. We’re going to view the key hedge fund action regarding Mallinckrodt plc (NYSE:MNK).

What does smart money think about Mallinckrodt plc (NYSE:MNK)?

Heading into the fourth quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in MNK a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Deerfield Management was the largest shareholder of Mallinckrodt plc (NYSE:MNK), with a stake worth $10.1 million reported as of the end of September. Trailing Deerfield Management was Armistice Capital, which amassed a stake valued at $9.6 million. Millennium Management, Miller Value Partners, and D E Shaw 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 Armistice Capital allocated the biggest weight to Mallinckrodt plc (NYSE:MNK), around 0.64% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, designating 0.41 percent of its 13F equity portfolio to MNK.

Since Mallinckrodt plc (NYSE:MNK) has faced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there exists a select few money managers that slashed their entire stakes heading into Q4. Intriguingly, Lee Ainslie’s Maverick Capital dropped the largest stake of all the hedgies monitored by Insider Monkey, totaling about $3.5 million in stock, and Jonathan Barrett and Paul Segal’s Luminus Management was right behind this move, as the fund cut about $3.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks similar to Mallinckrodt plc (NYSE:MNK). We will take a look at Smith Micro Software, Inc. (NASDAQ:SMSI), GSI Technology, Inc. (NASDAQ:GSIT), Arlington Asset Investment Corp (NYSE:AI), and Senseonics Holdings, Inc. (NYSE:SENS). All of these stocks’ market caps are closest to MNK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SMSI 4 3943 2
GSIT 6 17724 2
AI 7 20208 0
SENS 9 6292 0
Average 6.5 12042 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $34 million in MNK’s case. Senseonics Holdings, Inc. (NYSE:SENS) is the most popular stock in this table. On the other hand Smith Micro Software, Inc. (NASDAQ:SMSI) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Mallinckrodt plc (NYSE:MNK) is more popular among hedge funds. 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. Hedge funds were also right about betting on MNK as the stock returned 56.4% during the first two months of Q4 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.