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Did Hedge Funds Drop The Ball On MGP Ingredients Inc (MGPI) ?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards MGP Ingredients Inc (NASDAQ:MGPI) to find out whether it was one of their high conviction long-term ideas.

MGP Ingredients Inc (NASDAQ:MGPI) has experienced a decrease in support from the world’s most elite money managers of late. Our calculations also showed that MGPI isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

David Harding

Let’s take a look at the key hedge fund action encompassing MGP Ingredients Inc (NASDAQ:MGPI).

How have hedgies been trading MGP Ingredients Inc (NASDAQ:MGPI)?

At the end of the fourth quarter, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in MGPI a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

MGPI_apr2019

The largest stake in MGP Ingredients Inc (NASDAQ:MGPI) was held by Cardinal Capital, which reported holding $12.2 million worth of stock at the end of December. It was followed by Diker Management with a $5 million position. Other investors bullish on the company included Renaissance Technologies, Citadel Investment Group, and Winton Capital Management.

Judging by the fact that MGP Ingredients Inc (NASDAQ:MGPI) has witnessed falling interest from the smart money, logic holds that there was a specific group of hedgies who sold off their positions entirely heading into Q3. It’s worth mentioning that Mark Broach’s Manatuck Hill Partners dumped the biggest stake of the 700 funds monitored by Insider Monkey, valued at an estimated $10.4 million in stock. Richard Driehaus’s fund, Driehaus Capital, also sold off its stock, about $4.9 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 3 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to MGP Ingredients Inc (NASDAQ:MGPI). We will take a look at American Woodmark Corporation (NASDAQ:AMWD), Renewable Energy Group Inc (NASDAQ:REGI), RPT Realty (NYSE:RPT), and The Chefs Warehouse, Inc (NASDAQ:CHEF). This group of stocks’ market values match MGPI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMWD 11 44367 -6
REGI 18 83644 -3
RPT 11 12153 2
CHEF 10 49962 0
Average 12.5 47532 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $48 million. That figure was $24 million in MGPI’s case. Renewable Energy Group Inc (NASDAQ:REGI) is the most popular stock in this table. On the other hand The Chefs Warehouse, Inc (NASDAQ:CHEF) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks MGP Ingredients Inc (NASDAQ:MGPI) is even less popular than CHEF. Hedge funds clearly dropped the ball on MGPI as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 MGPI as the stock returned 49.9% and outperformed the market by an even larger margin.

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

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