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Were Hedge Funds Right About Ditching Mallinckrodt Public Limited Company (MNK)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Mallinckrodt Public Limited Company (NYSE:MNK) and determine whether hedge funds skillfully traded this stock.

Mallinckrodt Public Limited Company (NYSE:MNK) has seen a decrease in hedge fund interest of late. Our calculations also showed that MNK 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.

James Flynn Deerfield Management

James E. Flynn of Deerfield Management

With all of this in mind we’re going to analyze the new hedge fund action regarding Mallinckrodt Public Limited Company (NYSE:MNK).

What have hedge funds been doing with Mallinckrodt Public Limited Company (NYSE:MNK)?

At Q1’s end, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MNK over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Steven Boyd’s Armistice Capital has the most valuable call position in Mallinckrodt Public Limited Company (NYSE:MNK), worth close to $10.3 million, accounting for 0.6% of its total 13F portfolio. The second most bullish fund manager is James E. Flynn of Deerfield Management, with a $8 million position; 0.3% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism consist of Mark T. Gallogly’s Centerbridge Partners, John Overdeck and David Siegel’s Two Sigma Advisors and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Centerbridge Partners allocated the biggest weight to Mallinckrodt Public Limited Company (NYSE:MNK), around 0.56% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, earmarking 0.25 percent of its 13F equity portfolio to MNK.

Judging by the fact that Mallinckrodt Public Limited Company (NYSE:MNK) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there is a sect of hedge funds that elected to cut their full holdings heading into Q4. Intriguingly, Steven Boyd’s Armistice Capital said goodbye to the biggest investment of the “upper crust” of funds monitored by Insider Monkey, totaling close to $9.3 million in stock, and Bill Miller’s Miller Value Partners was right behind this move, as the fund dumped about $5.6 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Mallinckrodt Public Limited Company (NYSE:MNK) but similarly valued. These stocks are BRT Apartments Corp (NYSE:BRT), Oasis Midstream Partners LP (NASDAQ:OMP), Immersion Corporation (NASDAQ:IMMR), and Concrete Pumping Holdings, Inc. (NASDAQ:BBCP). This group of stocks’ market values match MNK’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BRT 6 9850 2
OMP 3 2880 -1
IMMR 11 64426 -3
BBCP 8 34588 2
Average 7 27936 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $28 million. That figure was $18 million in MNK’s case. Immersion Corporation (NASDAQ:IMMR) is the most popular stock in this table. On the other hand Oasis Midstream Partners LP (NASDAQ:OMP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Mallinckrodt Public Limited Company (NYSE:MNK) is more popular among hedge funds. 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. Unfortunately MNK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MNK were disappointed as the stock returned 0.5% since the end of the first 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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