Is M.D.C. Holdings, Inc. (MDC) Going To Burn These Hedge Funds ?

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 M.D.C. Holdings, Inc. (NYSE:MDC).

Hedge fund interest in M.D.C. Holdings, Inc. (NYSE:MDC) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare MDC to other stocks including Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), Holly Energy Partners, L.P. (NYSE:HEP), and Baozun Inc (NASDAQ:BZUN) to get a better sense of its popularity.
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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Christian Leone of Luxor Capital 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 glance at the recent hedge fund action regarding M.D.C. Holdings, Inc. (NYSE:MDC).

What does smart money think about M.D.C. Holdings, Inc. (NYSE:MDC)?

At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2019. On the other hand, there were a total of 11 hedge funds with a bullish position in MDC a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in M.D.C. Holdings, Inc. (NYSE:MDC) was held by Luxor Capital Group, which reported holding $26.5 million worth of stock at the end of September. It was followed by Polar Capital with a $22.7 million position. Other investors bullish on the company included Royce & Associates, Marshall Wace, and Samlyn Capital. In terms of the portfolio weights assigned to each position Waterfront Capital Partners allocated the biggest weight to M.D.C. Holdings, Inc. (NYSE:MDC), around 0.74% of its 13F portfolio. Luxor Capital Group is also relatively very bullish on the stock, designating 0.7 percent of its 13F equity portfolio to MDC.

Due to the fact that M.D.C. Holdings, Inc. (NYSE:MDC) has experienced falling interest from the smart money, it’s easy to see that there was a specific group of fund managers who were dropping their full holdings in the third quarter. At the top of the heap, Steve Leonard’s Pacifica Capital Investments said goodbye to the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth close to $12.6 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund sold off about $11.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to M.D.C. Holdings, Inc. (NYSE:MDC). These stocks are Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), Holly Energy Partners, L.P. (NYSE:HEP), Baozun Inc (NASDAQ:BZUN), and Sotheby’s (NYSE:BID). This group of stocks’ market values are similar to MDC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IBA 4 42960 1
HEP 6 14765 5
BZUN 16 58309 3
BID 18 702089 -2
Average 11 204531 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $205 million. That figure was $115 million in MDC’s case. Sotheby’s (NYSE:BID) is the most popular stock in this table. On the other hand Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) is the least popular one with only 4 bullish hedge fund positions. M.D.C. Holdings, Inc. (NYSE:MDC) 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 MDC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MDC were disappointed as the stock returned -7.5% 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.