Were Hedge Funds Right About Abandoning Magnolia Oil & Gas Corporation (MGY)?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Magnolia Oil & Gas Corporation (NYSE:MGY) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Is Magnolia Oil & Gas Corporation (NYSE:MGY) undervalued? Investors who are in the know are getting less optimistic. The number of long hedge fund positions were cut by 13 in recent months. Our calculations also showed that MGY isn’t among the 30 most popular stocks among hedge funds (see the video below). MGY was in 19 hedge funds’ portfolios at the end of June. There were 32 hedge funds in our database with MGY positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.


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. Let’s take a gander at the fresh hedge fund action surrounding Magnolia Oil & Gas Corporation (NYSE:MGY).

Hedge fund activity in Magnolia Oil & Gas Corporation (NYSE:MGY)

At the end of the second quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -41% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in MGY over the last 16 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).


More specifically, Encompass Capital Advisors was the largest shareholder of Magnolia Oil & Gas Corporation (NYSE:MGY), with a stake worth $56.6 million reported as of the end of March. Trailing Encompass Capital Advisors was Millennium Management, which amassed a stake valued at $42.9 million. Omega Advisors, Alyeska Investment Group, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Magnolia Oil & Gas Corporation (NYSE:MGY) has experienced bearish sentiment from hedge fund managers, it’s safe to say that there lies a certain “tier” of money managers that slashed their full holdings in the second quarter. Intriguingly, Glenn Russell Dubin’s Highbridge Capital Management sold off the biggest investment of the 750 funds watched by Insider Monkey, valued at close to $11.8 million in stock. David Rosen’s fund, Rubric Capital Management, also said goodbye to its stock, about $8.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 13 funds in the second quarter.

Let’s now review hedge fund activity in other stocks similar to Magnolia Oil & Gas Corporation (NYSE:MGY). These stocks are Domtar Corporation (NYSE:UFS), Uniqure NV (NASDAQ:QURE), BancorpSouth Bank (NYSE:BXS), and AllianceBernstein Holding LP (NYSE:AB). This group of stocks’ market values match MGY’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UFS 18 139587 -1
QURE 34 892256 6
BXS 12 62543 3
AB 10 25072 2
Average 18.5 279865 2.5

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 $280 million. That figure was $172 million in MGY’s case. Uniqure NV (NASDAQ:QURE) is the most popular stock in this table. On the other hand AllianceBernstein Holding LP (NYSE:AB) is the least popular one with only 10 bullish hedge fund positions. Magnolia Oil & Gas Corporation (NYSE:MGY) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MGY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MGY were disappointed as the stock returned -4.1% 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 this year.

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