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Did Hedge Funds Drop The Ball On Model N Inc (MODN) ?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds’ top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Model N Inc (NYSE:MODN).

Is Model N Inc (NYSE:MODN) ready to rally soon? The best stock pickers are selling. The number of long hedge fund bets were trimmed by 4 in recent months. Our calculations also showed that MODN isn’t among the 30 most popular stocks among hedge funds (see the video below). MODN was in 12 hedge funds’ portfolios at the end of June. There were 16 hedge funds in our database with MODN holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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’ 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 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 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.

MODN_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. Let’s go over the fresh hedge fund action surrounding Model N Inc (NYSE:MODN).

How have hedgies been trading Model N Inc (NYSE:MODN)?

At Q2’s end, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MODN over the last 16 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

D. E. Shaw

The largest stake in Model N Inc (NYSE:MODN) was held by Trigran Investments, which reported holding $39.2 million worth of stock at the end of March. It was followed by Portolan Capital Management with a $24.4 million position. Other investors bullish on the company included Renaissance Technologies, G2 Investment Partners Management, and D E Shaw.

Since Model N Inc (NYSE:MODN) has faced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of fund managers who sold off their positions entirely last quarter. Intriguingly, Israel Englander’s Millennium Management dumped the largest stake of all the hedgies watched by Insider Monkey, valued at about $3.3 million in stock. Bradley Louis Radoff’s fund, Fondren Management, also cut its stock, about $1.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Model N Inc (NYSE:MODN) but similarly valued. We will take a look at Uxin Limited (NASDAQ:UXIN), Tucows Inc. (NASDAQ:TCX), Front Yard Residential Corporation (NYSE:RESI), and Akorn, Inc. (NASDAQ:AKRX). This group of stocks’ market caps resemble MODN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UXIN 3 24561 -4
TCX 8 49968 -2
RESI 11 43581 -6
AKRX 14 116153 -2
Average 9 58566 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $112 million in MODN’s case. Akorn, Inc. (NASDAQ:AKRX) is the most popular stock in this table. On the other hand Uxin Limited (NASDAQ:UXIN) is the least popular one with only 3 bullish hedge fund positions. Model N Inc (NYSE:MODN) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on MODN as the stock returned 42.4% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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