Moelis & Company (MC): Hedge Fund Sentiment Crashed

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Moelis & Company (NYSE:MC).

Is Moelis & Company (NYSE:MC) undervalued? Hedge funds are becoming less hopeful. The number of long hedge fund bets were cut by 10 lately. Our calculations also showed that MC isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? 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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Keidan of Buckingham Capital

David Keidan of Buckingham Capital

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a glance at the recent hedge fund action encompassing Moelis & Company (NYSE:MC).

What have hedge funds been doing with Moelis & Company (NYSE:MC)?

At Q2’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -43% from the previous quarter. By comparison, 13 hedge funds held shares or bullish call options in MC a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

No of Hedge Funds with MC Positions

The largest stake in Moelis & Company (NYSE:MC) was held by Royce & Associates, which reported holding $16.8 million worth of stock at the end of March. It was followed by Point72 Asset Management with a $12.1 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Buckingham Capital Management.

Seeing as Moelis & Company (NYSE:MC) has faced declining sentiment from hedge fund managers, logic holds that there exists a select few hedge funds that elected to cut their positions entirely heading into Q3. Interestingly, Jacob Doft’s Highline Capital Management dumped the biggest investment of all the hedgies monitored by Insider Monkey, valued at an estimated $45.2 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund sold off about $17.3 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 10 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to Moelis & Company (NYSE:MC). These stocks are SPX FLOW, Inc. (NYSE:FLOW), GCP Applied Technologies Inc. (NYSE:GCP), Bloomin’ Brands Inc (NASDAQ:BLMN), and Kontoor Brands, Inc. (NYSE:KTB). All of these stocks’ market caps match MC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FLOW 16 180904 -4
GCP 23 457403 -3
BLMN 22 111584 -2
KTB 13 106850 13
Average 18.5 214185 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $214 million. That figure was $62 million in MC’s case. GCP Applied Technologies Inc. (NYSE:GCP) is the most popular stock in this table. On the other hand Kontoor Brands, Inc. (NYSE:KTB) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Moelis & Company (NYSE:MC) is even less popular than KTB. Hedge funds dodged a bullet by taking a bearish stance towards MC. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MC investors were disappointed as the stock returned -4.6% during the third quarter 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 in 2019.

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