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Did Hedge Funds Drop The Ball On Mercury Systems Inc (MRCY) ?

The market has been volatile in the fourth quarter as the Federal Reserve continued its rate hikes to normalize the interest rates. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, and the funds’ movements is one of the reasons why the major indexes have retraced. In this article, we analyze what the smart money thinks of Mercury Systems Inc (NASDAQ:MRCY) and find out how it is affected by hedge funds’ moves.

Mercury Systems Inc (NASDAQ:MRCY) was in 6 hedge funds’ portfolios at the end of the fourth quarter of 2018. MRCY investors should pay attention to a decrease in hedge fund interest lately. There were 11 hedge funds in our database with MRCY holdings at the end of the previous quarter. Our calculations also showed that MRCY isn’t among the 30 most popular stocks among hedge funds.

According to most shareholders, hedge funds are assumed to be worthless, old investment vehicles of years past. While there are more than 8000 funds trading today, Our experts look at the elite of this group, about 750 funds. These hedge fund managers control bulk of all hedge funds’ total asset base, and by tracking their first-class investments, Insider Monkey has figured out many investment strategies that have historically exceeded Mr. Market. Insider Monkey’s flagship hedge fund strategy outrun the S&P 500 index by nearly 5 percentage points per year since its inception in May 2014 through early November 2018. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 27.5% since February 2017 (through March 12th) even though the market was up nearly 25% during the same period. We just shared a list of 6 short targets in our latest quarterly update and they are already down an average of 6% in less than a month.

Richard Driehaus

Let’s take a look at the recent hedge fund action encompassing Mercury Systems Inc (NASDAQ:MRCY).

What have hedge funds been doing with Mercury Systems Inc (NASDAQ:MRCY)?

At the end of the fourth quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -45% from the second quarter of 2018. On the other hand, there were a total of 12 hedge funds with a bullish position in MRCY a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

MRCY_apr2019

The largest stake in Mercury Systems Inc (NASDAQ:MRCY) was held by D E Shaw, which reported holding $7.7 million worth of stock at the end of September. It was followed by Driehaus Capital with a $6.9 million position. Other investors bullish on the company included Millennium Management, PDT Partners, and Citadel Investment Group.

Judging by the fact that Mercury Systems Inc (NASDAQ:MRCY) has faced falling interest from the aggregate hedge fund industry, we can see that there exists a select few fund managers who were dropping their full holdings last quarter. Interestingly, Noam Gottesman’s GLG Partners dumped the biggest stake of the “upper crust” of funds followed by Insider Monkey, totaling about $4.8 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund sold off about $1.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Mercury Systems Inc (NASDAQ:MRCY). We will take a look at The Dolan Company (NYSE:DM), Domtar Corporation (NYSE:UFS), PolyOne Corporation (NYSE:POL), and Columbia Property Trust Inc (NYSE:CXP). This group of stocks’ market caps match MRCY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DM 5 13327 1
UFS 25 102549 3
POL 19 87717 4
CXP 13 57056 0
Average 15.5 65162 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $20 million in MRCY’s case. Domtar Corporation (NYSE:UFS) is the most popular stock in this table. On the other hand The Dolan Company (NYSE:DM) is the least popular one with only 5 bullish hedge fund positions. Mercury Systems Inc (NASDAQ:MRCY) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on MRCY as the stock returned 48.8% and outperformed the market by an even larger margin.

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

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