Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Magic Software Enterprises Ltd. (NASDAQ:MGIC)? The smart money sentiment can provide an answer to this question.
Hedge fund interest in Magic Software Enterprises Ltd. (NASDAQ:MGIC) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that MGIC isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). At the end of this article we will also compare MGIC to other stocks including Armada Hoffler Properties Inc (NYSE:AHH), Bonanza Creek Energy Inc (NYSE:BCEI), and Immatics N.V. (NASDAQ:IMTX) to get a better sense of its popularity.
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' 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 115 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.
Cathie Wood ARK Investment Management
Cathie Wood of ARK Investment Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund owns nearly 40% of this $23 biotech stock and is trying to buy the rest for around $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to take a gander at the fresh hedge fund action regarding Magic Software Enterprises Ltd. (NASDAQ:MGIC).
Do Hedge Funds Think MGIC Is A Good Stock To Buy Now?
At the end of the first quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MGIC over the last 23 quarters. 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 Magic Software Enterprises Ltd. (NASDAQ:MGIC) was held by Renaissance Technologies, which reported holding $9.7 million worth of stock at the end of December. It was followed by ARK Investment Management with a $5.1 million position. Other investors bullish on the company included Arrowstreet Capital, Citadel Investment Group, and Millennium Management. In terms of the portfolio weights assigned to each position Renaissance Technologies allocated the biggest weight to Magic Software Enterprises Ltd. (NASDAQ:MGIC), around 0.01% of its 13F portfolio. ARK Investment Management is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to MGIC.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Marshall Wace LLP. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was ARK Investment Management).
Let's now review hedge fund activity in other stocks similar to Magic Software Enterprises Ltd. (NASDAQ:MGIC). These stocks are Armada Hoffler Properties Inc (NYSE:AHH), Bonanza Creek Energy Inc (NYSE:BCEI), Immatics N.V. (NASDAQ:IMTX), Denison Mines Corp (NYSE:DNN), A10 Networks Inc (NYSE:ATEN), Maverix Metals Inc. (NYSE:MMX), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). This group of stocks' market valuations resemble MGIC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AHH,9,47661,-1 BCEI,19,72523,2 IMTX,23,192237,1 DNN,10,18188,4 ATEN,15,141659,-7 MMX,6,30937,-3 ARLP,7,37543,1 Average,12.7,77250,-0.4 [/table]
As you can see these stocks had an average of 12.7 hedge funds with bullish positions and the average amount invested in these stocks was $77 million. That figure was $18 million in MGIC's case. Immatics N.V. (NASDAQ:IMTX) is the most popular stock in this table. On the other hand Maverix Metals Inc. (NYSE:MMX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Magic Software Enterprises Ltd. (NASDAQ:MGIC) is even less popular than MMX. Our overall hedge fund sentiment score for MGIC is 35. 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. Hedge funds dodged a bullet by taking a bearish stance towards MGIC. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.4% in 2021 through June 18th but managed to beat the market again by 6.1 percentage points. Unfortunately MGIC wasn't nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); MGIC investors were disappointed as the stock returned -1.4% since the end of the first quarter (through 6/18) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
