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Hedge Funds Are Dipping Their Toes Into Medifast, Inc. (MED)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Medifast, Inc. (NYSE:MED) based on that data and determine whether they were really smart about the stock.

Medifast, Inc. (NYSE:MED) was in 18 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 28. MED shareholders have witnessed an increase in support from the world’s most elite money managers recently. There were 16 hedge funds in our database with MED holdings at the end of March. Our calculations also showed that MED isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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 stocks that are in our short portfolio.

Bill Miller

Bill Miller of Miller Value Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s go over the latest hedge fund action regarding Medifast, Inc. (NYSE:MED).

What have hedge funds been doing with Medifast, Inc. (NYSE:MED)?

At second quarter’s end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the previous quarter. By comparison, 19 hedge funds held shares or bullish call options in MED a year ago. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Engaged Capital was the largest shareholder of Medifast, Inc. (NYSE:MED), with a stake worth $161 million reported as of the end of September. Trailing Engaged Capital was Renaissance Technologies, which amassed a stake valued at $127.1 million. Miller Value Partners, Nantahala Capital Management, and GLG Partners 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 Engaged Capital allocated the biggest weight to Medifast, Inc. (NYSE:MED), around 17.35% of its 13F portfolio. 13D Management is also relatively very bullish on the stock, earmarking 3.47 percent of its 13F equity portfolio to MED.

Consequently, key money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most valuable position in Medifast, Inc. (NYSE:MED). Arrowstreet Capital had $6.4 million invested in the company at the end of the quarter. Lee Ainslie’s Maverick Capital also initiated a $0.8 million position during the quarter. The other funds with new positions in the stock are Brandon Haley’s Holocene Advisors, Minhua Zhang’s Weld Capital Management, and Cliff Asness’s AQR Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Medifast, Inc. (NYSE:MED) but similarly valued. These stocks are Six Flags Entertainment Corp (NYSE:SIX), Epizyme Inc (NASDAQ:EPZM), Eldorado Gold Corp (NYSE:EGO), Sogou Inc. (NYSE:SOGO), JELD-WEN Holding, Inc. (NYSE:JELD), CNX Resources Corporation (NYSE:CNX), and Adtalem Global Education Inc. (NYSE:ATGE). All of these stocks’ market caps are closest to MED’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SIX 33 494437 3
EPZM 23 317359 1
EGO 12 224197 -2
SOGO 5 15881 -1
JELD 15 193669 -5
CNX 28 495530 4
ATGE 22 317607 10
Average 19.7 294097 1.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.7 hedge funds with bullish positions and the average amount invested in these stocks was $294 million. That figure was $441 million in MED’s case. Six Flags Entertainment Corp (NYSE:SIX) is the most popular stock in this table. On the other hand Sogou Inc. (NYSE:SOGO) is the least popular one with only 5 bullish hedge fund positions. Medifast, Inc. (NYSE:MED) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MED is 49.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on MED as the stock returned 19.3% in the third quarter and outperformed the market by an even larger margin.

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