Should I Buy Model N Inc (MODN)?



How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Model N Inc (NYSE:MODN) and determine whether hedge funds had an edge regarding this stock.

Model N Inc (NYSE:MODN) was in 18 hedge funds’ portfolios at the end of June. The all time high for this statistics is 19. MODN has seen an increase in enthusiasm from smart money in recent months. There were 16 hedge funds in our database with MODN positions at the end of the first quarter. Our calculations also showed that MODN 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.

Kamran Moghtaderi of Eversept Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. With all of this in mind we’re going to check out the latest hedge fund action encompassing Model N Inc (NYSE:MODN).

What have hedge funds been doing with Model N Inc (NYSE:MODN)?

At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards MODN 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.

More specifically, Renaissance Technologies was the largest shareholder of Model N Inc (NYSE:MODN), with a stake worth $81 million reported as of the end of September. Trailing Renaissance Technologies was Two Sigma Advisors, which amassed a stake valued at $13.6 million. Eversept Partners, Arrowstreet Capital, and Driehaus Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position G2 Investment Partners Management allocated the biggest weight to Model N Inc (NYSE:MODN), around 1.98% of its 13F portfolio. Eversept Partners is also relatively very bullish on the stock, designating 1.91 percent of its 13F equity portfolio to MODN.

Now, key money managers have jumped into Model N Inc (NYSE:MODN) headfirst. Driehaus Capital, managed by Richard Driehaus, initiated the most valuable position in Model N Inc (NYSE:MODN). Driehaus Capital had $8.9 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also made a $0.9 million investment in the stock during the quarter. The other funds with brand new MODN positions are Joel Greenblatt’s Gotham Asset Management, Hoon Kim’s Quantinno Capital, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Model N Inc (NYSE:MODN) but similarly valued. We will take a look at Smith & Wesson Brands, Inc. (NASDAQ:SWBI), Banco Macro SA (NYSE:BMA), Veoneer, Inc. (NYSE:VNE), Compugen Ltd. (NASDAQ:CGEN), EnLink Midstream LLC (NYSE:ENLC), Amerisafe, Inc. (NASDAQ:AMSF), and Perficient, Inc. (NASDAQ:PRFT). This group of stocks’ market valuations match MODN’s market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SWBI,24,143917,2 BMA,11,77409,3 VNE,14,99577,3 CGEN,9,95289,1 ENLC,7,13998,0 AMSF,12,39039,3 PRFT,21,61424,0 Average,14,75808,1.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $153 million in MODN’s case. Smith & Wesson Brands, Inc. (NASDAQ:SWBI) is the most popular stock in this table. On the other hand EnLink Midstream LLC (NYSE:ENLC) is the least popular one with only 7 bullish hedge fund positions. Model N Inc (NYSE:MODN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MODN is 67.8. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately MODN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MODN were disappointed as the stock returned 1.5% in Q3 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.

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

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