Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 9 percentage points since the end of the third quarter of 2018 as investors worried over the possible ramifications of rising interest rates and escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Monolithic Power Systems, Inc. (NASDAQ:MPWR) and see how the stock is affected by the recent hedge fund activity.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let’s view the new hedge fund action encompassing Monolithic Power Systems, Inc. (NASDAQ:MPWR).
How are hedge funds trading Monolithic Power Systems, Inc. (NASDAQ:MPWR)?
At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. On the other hand, there were a total of 16 hedge funds with a bullish position in MPWR a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Whale Rock Capital Management was the largest shareholder of Monolithic Power Systems, Inc. (NASDAQ:MPWR), with a stake worth $54.2 million reported as of the end of March. Trailing Whale Rock Capital Management was Polar Capital, which amassed a stake valued at $31.3 million. Millennium Management, Osterweis Capital Management, and Cavalry Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as Monolithic Power Systems, Inc. (NASDAQ:MPWR) has faced falling interest from the smart money, it’s easy to see that there exists a select few money managers that slashed their entire stakes in the third quarter. Intriguingly, Phill Gross and Robert Atchinson’s Adage Capital Management cut the biggest position of all the hedgies tracked by Insider Monkey, totaling an estimated $11.8 million in stock, and Neal Nathani and Darren Dinneen’s Totem Point Management was right behind this move, as the fund said goodbye to about $7.3 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 5 funds in the third quarter.
Let’s also examine hedge fund activity in other stocks similar to Monolithic Power Systems, Inc. (NASDAQ:MPWR). These stocks are Encompass Health Corporation (NYSE:EHC), EPR Properties (NYSE:EPR), First American Financial Corp (NYSE:FAF), and HUYA Inc. (NYSE:HUYA). All of these stocks’ market caps are closest to MPWR’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $397 million. That figure was $173 million in MPWR’s case. First American Financial Corp (NYSE:FAF) is the most popular stock in this table. On the other hand EPR Properties (NYSE:EPR) is the least popular one with only 17 bullish hedge fund positions. Monolithic Power Systems, Inc. (NASDAQ:MPWR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately MPWR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MPWR investors were disappointed as the stock returned -12.6% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.