Did Hedge Funds Make The Right Call On MSC Industrial Direct Co Inc (MSM) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards MSC Industrial Direct Co Inc (NYSE:MSM) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is MSC Industrial Direct Co Inc (NYSE:MSM) the right investment to pursue these days? The best stock pickers were in a pessimistic mood. The number of bullish hedge fund positions shrunk by 7 in recent months. Our calculations also showed that MSM isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s go over the recent hedge fund action regarding MSC Industrial Direct Co Inc (NYSE:MSM).

Hedge fund activity in MSC Industrial Direct Co Inc (NYSE:MSM)

At Q1’s end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MSM over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Yacktman Asset Management was the largest shareholder of MSC Industrial Direct Co Inc (NYSE:MSM), with a stake worth $84.2 million reported as of the end of September. Trailing Yacktman Asset Management was Paradice Investment Management, which amassed a stake valued at $46.6 million. Carlson Capital, Pzena Investment Management, and Royce & Associates 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 Paradice Investment Management allocated the biggest weight to MSC Industrial Direct Co Inc (NYSE:MSM), around 5.17% of its 13F portfolio. Value Holdings LP is also relatively very bullish on the stock, earmarking 2.58 percent of its 13F equity portfolio to MSM.

Because MSC Industrial Direct Co Inc (NYSE:MSM) has faced a decline in interest from hedge fund managers, it’s easy to see that there exists a select few money managers who were dropping their full holdings by the end of the first quarter. At the top of the heap, Israel Englander’s Millennium Management sold off the largest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $10.6 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund dropped about $2.4 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 7 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as MSC Industrial Direct Co Inc (NYSE:MSM) but similarly valued. These stocks are SLM Corp (NASDAQ:SLM), Grupo Aeroportuario del Pacifico (NYSE:PAC), PNM Resources, Inc. (NYSE:PNM), and TechnipFMC plc (NYSE:FTI). This group of stocks’ market caps resemble MSM’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $321 million. That figure was $240 million in MSM’s case. TechnipFMC plc (NYSE:FTI) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Pacifico (NYSE:PAC) is the least popular one with only 5 bullish hedge fund positions. MSC Industrial Direct Co Inc (NYSE:MSM) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on MSM as the stock returned 34.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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