Is Mallinckrodt Public Limited Company (MNK) A Good Stock To Buy?

Abigail Fisher

Updated Sat, Dec 15, 2018, 8:56 PM

During the first half of the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by about 4 percentage points as investors worried over the possible ramifications of rising interest rates. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Mallinckrodt Public Limited Company (NYSE:MNK) and see how the stock is affected by the recent hedge fund activity.

Mallinckrodt Public Limited Company (NYSE:MNK) was in 20 hedge funds' portfolios at the end of September. MNK has experienced a decrease in hedge fund sentiment lately. There were 21 hedge funds in our database with MNK positions at the end of the previous quarter. Our calculations also showed that MNK isn't among the 30 most popular stocks among hedge funds.

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (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 24% through December 3, 2018. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Let's take a peek at the fresh hedge fund action regarding Mallinckrodt Public Limited Company (NYSE:MNK).

What does the smart money think about Mallinckrodt Public Limited Company (NYSE:MNK)?

At the end of the third quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in MNK over the last 13 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Scopia Capital held the most valuable stake in Mallinckrodt Public Limited Company (NYSE:MNK), which was worth $138.5 million at the end of the third quarter. On the second spot was D E Shaw which amassed $117.5 million worth of shares. Moreover, Paulson & Co, Armistice Capital, and Royce & Associates were also bullish on Mallinckrodt Public Limited Company (NYSE:MNK), allocating a large percentage of their portfolios to this stock.

Since Mallinckrodt Public Limited Company (NYSE:MNK) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there were a few hedge funds who sold off their positions entirely heading into Q3. Interestingly, James E. Flynn's Deerfield Management cut the largest position of the 700 funds tracked by Insider Monkey, totaling close to $130.4 million in stock, and Stephen DuBois's Camber Capital Management was right behind this move, as the fund sold off about $35.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds heading into Q3.

Let's now take a look at 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 Premier Inc (NASDAQ:PINC), Regenxbio Inc (NASDAQ:RGNX), Avaya Holdings Corp. (NYSE:AVYA), and Chart Industries, Inc. (NASDAQ:GTLS). All of these stocks' market caps resemble MNK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PINC,21,214420,3 RGNX,24,418010,3 AVYA,34,588061,0 GTLS,18,158921,2 Average,24.25,344853,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $345 million. That figure was $491 million in MNK's case. Avaya Holdings Corp. (NYSE:AVYA) is the most popular stock in this table. On the other hand Chart Industries, Inc. (NASDAQ:GTLS) is the least popular one with only 18 bullish hedge fund positions. Mallinckrodt Public Limited Company (NYSE:MNK) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. In this regard AVYA might be a better candidate to consider a long position.

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

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