Here’s What Hedge Funds Think About Madrigal Pharmaceuticals, Inc. (MDGL)

Nina Todic

Wed, Jun 19, 2019, 7:07 PM

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 12.1% in 2019 (through May 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 18.7% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).

Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 hedge funds' portfolios at the end of the first quarter of 2019. At the end of this article we will also compare MDGL to other stocks including Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY), CNOOC Limited (NYSE:CEO), and Alexander's, Inc. (NYSE:ALX) to get a better sense of its popularity.

To most market participants, hedge funds are seen as worthless, old investment tools of the past. While there are greater than 8000 funds trading at the moment, Our researchers hone in on the bigwigs of this group, around 750 funds. These money managers control most of all hedge funds' total capital, and by tailing their unrivaled stock picks, Insider Monkey has brought to light a few investment strategies that have historically defeated the broader indices. Insider Monkey's flagship hedge fund strategy outstripped the S&P 500 index by around 5 percentage points a year since its inception in May 2014 through the end of May. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 30.9% since February 2017 (through May 30th) even though the market was up nearly 24% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 11.9% in less than a couple of weeks whereas our long picks outperformed the market by 2 percentage points in this volatile 2 week period.

Let's take a glance at the fresh hedge fund action surrounding Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL).

How have hedgies been trading Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the fourth quarter of 2018. On the other hand, there were a total of 17 hedge funds with a bullish position in MDGL a year ago. With hedgies' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

More specifically, Baker Bros. Advisors was the largest shareholder of Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL), with a stake worth $146.5 million reported as of the end of March. Trailing Baker Bros. Advisors was Healthcor Management LP, which amassed a stake valued at $111.7 million. Armistice Capital, venBio Select Advisor, and Rock Springs Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) has faced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of funds who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Jeffrey Jay and David Kroin's Great Point Partners sold off the largest position of all the hedgies monitored by Insider Monkey, comprising about $3.1 million in stock, and John Overdeck and David Siegel's Two Sigma Advisors was right behind this move, as the fund said goodbye to about $2.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks similar to Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL). These stocks are Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY), CNOOC Limited (NYSE:CEO), Alexander's, Inc. (NYSE:ALX), and Genworth Financial Inc (NYSE:GNW). All of these stocks' market caps are closest to MDGL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PLAY,21,196673,-1 CEO,13,294074,-2 ALX,4,68989,-2 GNW,24,109872,2 Average,15.5,167402,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $167 million. That figure was $419 million in MDGL's case. Genworth Financial Inc (NYSE:GNW) is the most popular stock in this table. On the other hand Alexander's, Inc. (NYSE:ALX) is the least popular one with only 4 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. 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately MDGL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MDGL were disappointed as the stock returned -26.4% during the same 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.

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

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