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Should You Avoid Madrigal Pharmaceuticals, Inc. (MDGL)?

In this article you are going to find out whether hedge funds think Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) investors should be aware of a decrease in hedge fund sentiment recently. MDGL was in 15 hedge funds’ portfolios at the end of the first quarter of 2020. There were 19 hedge funds in our database with MDGL positions at the end of the previous quarter. Our calculations also showed that MDGL isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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 stocks that are in our short portfolio.

Arthur B Cohen and Joseph Healey of Healthcor Management LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology’s influence will go beyond online payments. So, we are checking out this futurist’s moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to review the key hedge fund action surrounding Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).

How are hedge funds trading Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL)?

Heading into the second quarter of 2020, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MDGL over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Baker Bros. Advisors was the largest shareholder of Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL), with a stake worth $100.1 million reported as of the end of September. Trailing Baker Bros. Advisors was Healthcor Management LP, which amassed a stake valued at $93.6 million. Avoro Capital Advisors (venBio Select Advisor), Rock Springs Capital Management, and Armistice Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Healthcor Management LP allocated the biggest weight to Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL), around 4% of its 13F portfolio. Parkman Healthcare Partners is also relatively very bullish on the stock, earmarking 0.93 percent of its 13F equity portfolio to MDGL.

Since Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) has experienced falling interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedgies that elected to cut their full holdings last quarter. Intriguingly, Benjamin A. Smith’s Laurion Capital Management dropped the biggest stake of all the hedgies monitored by Insider Monkey, worth about $12.4 million in stock. Jonathan Barrett and Paul Segal’s fund, Luminus Management, also cut its stock, about $11.2 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 4 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) but similarly valued. These stocks are Kornit Digital Ltd. (NASDAQ:KRNT), Eldorado Gold Corp (NYSE:EGO), Enanta Pharmaceuticals Inc (NASDAQ:ENTA), and John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS). This group of stocks’ market valuations are similar to MDGL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KRNT 9 28349 -3
EGO 14 137122 1
ENTA 18 217411 -3
JBSS 14 63220 -3
Average 13.75 111526 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $112 million. That figure was $270 million in MDGL’s case. Enanta Pharmaceuticals Inc (NASDAQ:ENTA) is the most popular stock in this table. On the other hand Kornit Digital Ltd. (NASDAQ:KRNT) is the least popular one with only 9 bullish hedge fund positions. Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on MDGL as the stock returned 65.8% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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