Medifast Inc (MED): Are Hedge Funds Right About This Stock?

Legendary investors such as Leon Cooperman and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those successful funds in these small-cap stocks. In the following paragraphs, we will analyze Medifast Inc (NYSE:MED) from the perspective of those successful funds.

Medifast Inc (NYSE:MED) was included in the 13F portfolios of 15 funds tracked by Insider Monkey at the end of September. The company witnessed a slight decline in popularity last quarter, as there had been 16 funds bullish on MED at the end of June. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Western Asset Mortgage Capital Corp (NYSE:WMC), First Community Bancshares Inc (NASDAQ:FCBC), and Lion Biotechnologies Inc (NASDAQ:LBIO) to gather more data points.

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At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Keeping this in mind, let’s take a peek at the fresh action encompassing Medifast Inc (NYSE:MED).

How have hedgies been trading Medifast Inc (NYSE:MED)?

At the end of the third quarter, 15 funds tracked by Insider Monkey were long Medifast, down by 6% from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in MED heading into this year. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Jim Simons’ Renaissance Technologies holds the number one position in Medifast Inc (NYSE:MED). Renaissance Technologies has a $35.8 million position in the stock, comprising 0.1% of its 13F portfolio. The second most bullish fund is Glenn W. Welling’s Engaged Capital, with a $27.9 million position; 10.1% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Robert B. Gillam’s McKinley Capital Management, and Cliff Asness’ AQR Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Judging by the fact that Medifast Inc (NYSE:MED) has experienced falling interest from the smart money, logic holds that there exists a select few fund managers that slashed their full holdings between July and September. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP cut the biggest stake of all the hedgies tracked by Insider Monkey, valued at an estimated $2.5 million in stock. Ken Griffin’s fund, Citadel Investment Group, also said goodbye to its stock, about $0.6 million worth.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Medifast Inc (NYSE:MED) but similarly valued. We will take a look at Western Asset Mortgage Capital Corp (NYSE:WMC), First Community Bancshares Inc (NASDAQ:FCBC), Lion Biotechnologies Inc (NASDAQ:LBIO), and REX American Resources Corp (NYSE:REX). This group of stocks’ market caps match MED’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WMC 6 6129 2
FCBC 4 5955 0
LBIO 19 162742 2
REX 8 68306 2

As you can see these stocks had an average of nine funds with bullish positions and the average amount invested in these stocks was $61 million, versus $88 million in MED’s case. Lion Biotechnologies Inc (NASDAQ:LBIO) is the most popular stock in this table. On the other hand First Community Bancshares Inc (NASDAQ:FCBC) is the least popular one with only four investors holding shares. Medifast Inc (NYSE:MED) 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. In this regard Lion Biotechnologies Inc (NASDAQ:LBIO) might be a better candidate to consider taking a long position in.