Hedge Funds Have Never Been Less Bullish On MDC Partners (NASDAQ:MDCA)

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards MDC Partners Inc. (NASDAQ:MDCA).

MDC Partners Inc. (NASDAQ:MDCA) has seen a decrease in hedge fund sentiment recently. MDCA was in 13 hedge funds’ portfolios at the end of September. There were 15 hedge funds in our database with MDCA positions at the end of the previous quarter. Our calculations also showed that MDCA isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.


Ken Griffin of Citadel Investment Group

We leave no stone unturned when looking for the next great investment idea. For example, Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a look at the fresh hedge fund action encompassing MDC Partners Inc. (NASDAQ:MDCA).

How are hedge funds trading MDC Partners Inc. (NASDAQ:MDCA)?

At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 15 hedge funds with a bullish position in MDCA a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Is MDC Partners Inc. (NASDAQ:MDCA) Going to Burn These Hedge Funds?

Among these funds, Indaba Capital Management held the most valuable stake in MDC Partners Inc. (NASDAQ:MDCA), which was worth $20.3 million at the end of the third quarter. On the second spot was Redwood Capital Management which amassed $6.9 million worth of shares. FrontFour Capital Group, Becker Drapkin Management, and Citadel Investment Group 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, FrontFour Capital Group allocated the biggest weight to MDC Partners Inc. (NASDAQ:MDCA), around 23.97% of its 13F portfolio. Indaba Capital Management is also relatively very bullish on the stock, designating 4.73 percent of its 13F equity portfolio to MDCA.

Judging by the fact that MDC Partners Inc. (NASDAQ:MDCA) has witnessed declining sentiment from the smart money, we can see that there were a few hedgies that decided to sell off their full holdings heading into Q4. Interestingly, Marc Majzner’s Clearline Capital dumped the largest position of the “upper crust” of funds watched by Insider Monkey, valued at close to $0.3 million in stock, and Cliff Asness’s AQR Capital Management was right behind this move, as the fund dropped about $0.1 million worth. These moves are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to MDC Partners Inc. (NASDAQ:MDCA). We will take a look at Osmotica Pharmaceuticals plc (NASDAQ:OSMT), Culp, Inc. (NYSE:CULP), PICO Holdings Inc (NASDAQ:PICO), and Mallinckrodt Public Limited Company (NYSE:MNK). This group of stocks’ market values resembles MDCA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OSMT 3 950 -3
CULP 5 14536 0
PICO 11 27759 1
MNK 20 34235 0
Average 9.75 19370 -0.5

View the table here if you experience formatting issues.

As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $40 million in MDCA’s case. Mallinckrodt Public Limited Company (NYSE:MNK) is the most popular stock in this table. On the other hand, Osmotica Pharmaceuticals plc (NASDAQ:OSMT) is the least popular one with only 3 bullish hedge fund positions. MDC Partners Inc. (NASDAQ:MDCA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately, MDCA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MDCA were disappointed as the stock returned -17.4% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large-cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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