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McDermott International (MDR): Are Hedge Funds Right About This Stock?

During the first half of the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by about 4 percentage points as investors worried over the possible ramifications of rising interest rates. 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 McDermott International (NYSE:MDR) and see how the stock is affected by the recent hedge fund activity.

Is McDermott International (NYSE:MDR) ready to rally soon? The best stock pickers are taking a bullish view. The number of long hedge fund positions improved by 2 recently. Our calculations also showed that MDR isn’t among the 30 most popular stocks among hedge funds. MDR was in 24 hedge funds’ portfolios at the end of September. There were 22 hedge funds in our database with MDR positions at the end of the previous quarter.

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 18 percentage points since May 2014 through December 3, 2018 (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.

TUDOR INVESTMENT CORP

Let’s analyze the fresh hedge fund action encompassing McDermott International (NYSE:MDR).

How are hedge funds trading McDermott International (NYSE:MDR)?

At Q3’s end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards MDR over the last 13 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

MDR_dec2018

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Jonathan Barrett and Paul Segal’s Luminus Management has the biggest position in McDermott International (NYSE:MDR), worth close to $65.2 million, accounting for 1.3% of its total 13F portfolio. The second largest stake is held by Michael Blitzer of Kingstown Capital Management, with a $64.5 million position; the fund has 8.6% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish encompass Matthew Knauer and Mina Faltas’s Nokota Management, David Rosen’s Rubric Capital Management and Larry Foley and Paul Farrell’s Bronson Point Partners.

As aggregate interest increased, key money managers were breaking ground themselves. Arrowgrass Capital Partners, managed by Nick Niell, assembled the most outsized position in McDermott International (NYSE:MDR). Arrowgrass Capital Partners had $4 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $0.7 million investment in the stock during the quarter. The following funds were also among the new MDR investors: Dmitry Balyasny’s Balyasny Asset Management and George Zweig, Shane Haas and Ravi Chander’s Signition LP.

Let’s now take a look at hedge fund activity in other stocks similar to McDermott International (NYSE:MDR). We will take a look at Nuveen AMT-Free Quality Municipal Income Fund (NYSE:NEA), RPC, Inc. (NYSE:RES), Avista Corp (NYSE:AVA), and Bank of Hawaii Corporation (NYSE:BOH). This group of stocks’ market caps match MDR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NEA 3 7428 -1
RES 15 153824 -4
AVA 17 481402 2
BOH 12 85295 1
Average 11.75 181987 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $182 million. That figure was $323 million in MDR’s case. Avista Corp (NYSE:AVA) is the most popular stock in this table. On the other hand Nuveen AMT-Free Quality Municipal Income Fund (NYSE:NEA) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks McDermott International (NYSE:MDR) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

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

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