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Facebook and Alphabet Inc Disrupting MDC Partners Inc. (MDCA)

Is MDC Partners Inc. (NASDAQ:MDCA) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before doing days of research on it. Given their 2 and 20 payment structure, hedge funds have more resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Activist hedge fund FrontFour Capital doubled its MDCA position during Q2 and then doubled that position again in Q3 as the stock’s price plunged into oblivion. Other hedge fund managers have been selling MDC Partners Inc.  (NASDAQ:MDCA) shares lately.

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 17.4% year to date and outperformed the market by more than 14 percentage points this year. This strategy also outperformed the market by 3 percentage points in the fourth quarter despite the market volatility (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David Lorber FrontFour Capital

Before getting into whether it makes sense to invest in MDC Partners right now, let’s first check out the latest hedge fund action surrounding MDC Partners Inc. (NASDAQ:MDCA).

How have hedgies been trading MDC Partners Inc. (NASDAQ:MDCA)?

At the end of the third quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MDCA over the last 13 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

MDCA_nov2018

Among these funds, FrontFour Capital Group held the most valuable stake in MDC Partners Inc. (NASDAQ:MDCA), which was worth $9.5 million at the end of the third quarter. On the second spot was Redwood Capital Management which amassed $5.9 million worth of shares. Moreover, Blue Mountain Capital, Act II Capital, and AQR Capital Management were also bullish on MDC Partners Inc. (NASDAQ:MDCA), allocating a large percentage of their portfolios to this stock.

Judging by the fact that MDC Partners Inc. (NASDAQ:MDCA) has experienced bearish sentiment from the smart money, it’s easy to see that there lies a certain “tier” of funds that slashed their full holdings in the third quarter. Intriguingly, Mark Rachesky’s MHR Fund Management sold off the biggest investment of all the hedgies tracked by Insider Monkey, comprising close to $1.7 million in stock. Robert Henry Lynch’s fund, Aristeia Capital, also dumped its stock, about $0.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 1 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as MDC Partners Inc. (NASDAQ:MDCA) but similarly valued. We will take a look at Celsius Holdings, Inc. (NASDAQ:CELH), Manitex International, Inc. (NASDAQ:MNTX), Chemung Financial Corp. (NASDAQ:CHMG), and MVB Financial Corp. (NASDAQ:MVBF). This group of stocks’ market valuations are similar to MDCA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CELH 1 68 -1
MNTX 6 9930 1
CHMG 3 15099 0
MVBF 2 19079 -2

As you can see these stocks had an average of 3 hedge funds with bullish positions and the average amount invested in these stocks was $11 million. That figure was $29 million in MDCA’s case. Manitex International, Inc. (NASDAQ:MNTX) is the most popular stock in this table. On the other hand Celsius Holdings, Inc. (NASDAQ:CELH) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks MDC Partners Inc. (NASDAQ:MDCA) is much more popular among hedge funds.

In a regulatory filing yesterday FrontFour Capital said the following about the stock:

“FrontFour first initiated private conversations with the Board in August 2018 in an attempt to constructively outline a strategy that would result in the replacement of Scott L. Kauffman as CEO with a candidate better suited to leverage the strength of the Issuer’s agencies and grow the Issuer’s market share in key industries. Shortly thereafter, the Board hastily announced Mr. Kauffman’s intention to resign as CEO by December 31, 2018 without having commenced a search for his replacement, and then announced the launch of a strategic review process a week later.

FrontFour has stressed the importance of shareholder representation on the Board to better align the perspective of the Board with that of the Issuer’s shareholders, particularly at this critical juncture, but the Board has rejected FrontFour’s requests. FrontFour continues to believe that significant changes to the composition of the Board are required in order to ensure that the best interests of shareholders are represented in the boardroom and therefore is evaluating all available options, including seeking changes to the composition of the Board at a special meeting of shareholders requisitioned for such purpose. FrontFour may continue to enter into discussions with management and the Board and reserves all rights to take any and all action with respect to its investment in the Issuer.”

Interestingly billionaire Leon Cooperman has a very small $200 thousand position in the stock, yet he was compelled to scold MDCA’s management in its August earnings call. “The handwriting is on the wall that things were slower than you thought. Why did it take so long to deal with your cost structure?” Coorperman asked.

We believe hedge fund interest in the stock is high relative to other companies because the stock turned into a value trap as its lost more than 75% of its value this year. Facebook Inc (NASDAQ:FB) and Alphabet Inc. (NASDAQ:GOOGL) have not only been destroying newspapers and online publishers but also ad agencies. Insider Monkey’s ad agency has been performing very poorly over the last couple of years as existing clients cut allocations and divert ad dollars to Alphabet Inc, Facebook Inc, and programmatic ads. We don’t think these trends will reverse. We’d like to remind our readers the following Warren Buffett quote:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Collectively hedge funds are betting on Facebook Inc (NASDAQ:FB) and Alphabet Inc. (NASDAQ:GOOGL) as these stocks are among the most popular stocks (see the list of 30 most popular stocks among hedge funds). We’s like to invest in situations where probability of large gains is larger than the probability of large losses. We’d rather invest in Facebook or Google which are disrupting the ad industry.

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

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