Were These Hedge Funds Right About Selling Mimecast Limited (MIME)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Mimecast Limited (NASDAQ:MIME).

Mimecast Limited (NASDAQ:MIME) was in 34 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. MIME has experienced a decrease in hedge fund sentiment of late. There were 39 hedge funds in our database with MIME positions at the end of the first quarter. Our calculations also showed that MIME isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we’re going to take a look at the new hedge fund action encompassing Mimecast Limited (NASDAQ:MIME).

What have hedge funds been doing with Mimecast Limited (NASDAQ:MIME)?

At Q2’s end, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MIME over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Mimecast Limited (NASDAQ:MIME) was held by Point72 Asset Management, which reported holding $69.4 million worth of stock at the end of June. It was followed by Greenvale Capital with a $33.3 million position. Other investors bullish on the company included Marshall Wace LLP, Kingdon Capital, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Indaba Capital Management allocated the biggest weight to Mimecast Limited (NASDAQ:MIME), around 5.31% of its 13F portfolio. Greenvale Capital is also relatively very bullish on the stock, setting aside 5.13 percent of its 13F equity portfolio to MIME.

Due to the fact that Mimecast Limited (NASDAQ:MIME) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there was a specific group of funds who sold off their entire stakes last quarter. Interestingly, Alex Sacerdote’s Whale Rock Capital Management cut the biggest stake of all the hedgies watched by Insider Monkey, totaling an estimated $124.9 million in stock, and Colin Moran’s Abdiel Capital Advisors was right behind this move, as the fund dropped about $83.5 million worth. These moves are important to note, as total hedge fund interest was cut by 5 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Mimecast Limited (NASDAQ:MIME) but similarly valued. These stocks are Brighthouse Financial, Inc. (NASDAQ:BHF), Diodes Incorporated (NASDAQ:DIOD), Manchester United PLC (NYSE:MANU), Green Dot Corporation (NYSE:GDOT), Advanced Energy Industries, Inc. (NASDAQ:AEIS), Acushnet Holdings Corp. (NYSE:GOLF), and Webster Financial Corporation (NYSE:WBS). All of these stocks’ market caps are similar to MIME’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.6 hedge funds with bullish positions and the average amount invested in these stocks was $215 million. That figure was $257 million in MIME’s case. Brighthouse Financial, Inc. (NASDAQ:BHF) is the most popular stock in this table. On the other hand Manchester United PLC (NYSE:MANU) is the least popular one with only 11 bullish hedge fund positions. Mimecast Limited (NASDAQ:MIME) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MIME is 76.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately MIME wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MIME were disappointed as the stock returned -8.3% since the end of June (through 10/30) 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.

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