Were Hedge Funds Right About Medifast, Inc. (MED)?

Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In this article we are going to take a closer look at Medifast, Inc. (NYSE:MED).

Medifast, Inc. (NYSE:MED) was in 19 hedge funds’ portfolios at the end of the fourth quarter of 2019. MED investors should pay attention to a decrease in enthusiasm from smart money lately. There were 23 hedge funds in our database with MED holdings at the end of the previous quarter. Our calculations also showed that MED isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Bill Miller

Bill Miller of Miller Value Partners

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the “next Amazon” in this video; again we are listening. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s view the latest hedge fund action encompassing Medifast, Inc. (NYSE:MED).

What have hedge funds been doing with Medifast, Inc. (NYSE:MED)?

Heading into the first quarter of 2020, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in MED a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Medifast, Inc. (NYSE:MED) was held by Engaged Capital, which reported holding $127.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $102.3 million position. Other investors bullish on the company included Miller Value Partners, GLG Partners, and 13D Management. In terms of the portfolio weights assigned to each position Engaged Capital allocated the biggest weight to Medifast, Inc. (NYSE:MED), around 13.21% of its 13F portfolio. 13D Management is also relatively very bullish on the stock, dishing out 5.01 percent of its 13F equity portfolio to MED.

Due to the fact that Medifast, Inc. (NYSE:MED) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers that slashed their full holdings heading into Q4. Interestingly, Mark Kingdon’s Kingdon Capital cut the largest position of the “upper crust” of funds tracked by Insider Monkey, totaling about $13.6 million in stock, and Philip Hempleman’s Ardsley Partners was right behind this move, as the fund cut about $9.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds heading into Q4.

Let’s check out 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 Boot Barn Holdings Inc (NYSE:BOOT), Amerisafe, Inc. (NASDAQ:AMSF), Health Catalyst, Inc (NASDAQ:HCAT), and The E.W. Scripps Company (NASDAQ:SSP). All of these stocks’ market caps resemble MED’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BOOT 28 154923 5
AMSF 10 35236 -4
HCAT 8 37534 -5
SSP 12 149633 -5
Average 14.5 94332 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $94 million. That figure was $442 million in MED’s case. Boot Barn Holdings Inc (NYSE:BOOT) is the most popular stock in this table. On the other hand Health Catalyst, Inc (NASDAQ:HCAT) is the least popular one with only 8 bullish hedge fund positions. 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. 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately MED wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MED were disappointed as the stock returned -31.9% during the same time period 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 many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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