Did Hedge Funds Make The Right Call On ServiceMaster Global Holdings Inc (SERV)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtServiceMaster Global Holdings Inc (NYSE:SERV) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is ServiceMaster Global Holdings Inc (NYSE:SERV) a healthy stock for your portfolio? Investors who are in the know were getting less bullish. The number of bullish hedge fund bets were cut by 11 recently. Our calculations also showed that SERV 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 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 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 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.

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind we’re going to go over the fresh hedge fund action encompassing ServiceMaster Global Holdings Inc (NYSE:SERV).

What have hedge funds been doing with ServiceMaster Global Holdings Inc (NYSE:SERV)?

Heading into the second quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from one quarter earlier. On the other hand, there were a total of 24 hedge funds with a bullish position in SERV a year ago. 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, Iridian Asset Management held the most valuable stake in ServiceMaster Global Holdings Inc (NYSE:SERV), which was worth $145.4 million at the end of the third quarter. On the second spot was Southpoint Capital Advisors which amassed $110.3 million worth of shares. Gates Capital Management, Third Point, and Suvretta Capital Management 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 Gates Capital Management allocated the biggest weight to ServiceMaster Global Holdings Inc (NYSE:SERV), around 5.85% of its 13F portfolio. Lionstone Capital Management is also relatively very bullish on the stock, designating 5.78 percent of its 13F equity portfolio to SERV.

Since ServiceMaster Global Holdings Inc (NYSE:SERV) has experienced a decline in interest from hedge fund managers, it’s safe to say that there exists a select few hedgies that decided to sell off their entire stakes heading into Q4. Intriguingly, Robert Joseph Caruso’s Select Equity Group said goodbye to the biggest stake of the “upper crust” of funds followed by Insider Monkey, valued at about $343.3 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund said goodbye to about $21 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 11 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to ServiceMaster Global Holdings Inc (NYSE:SERV). We will take a look at J2 Global Inc (NASDAQ:JCOM), Inphi Corporation (NYSE:IPHI), Under Armour Inc (NYSE:UA), and Primerica, Inc. (NYSE:PRI). This group of stocks’ market caps match SERV’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $417 million. That figure was $594 million in SERV’s case. Under Armour Inc (NYSE:UA) is the most popular stock in this table. On the other hand J2 Global Inc (NASDAQ:JCOM) is the least popular one with only 21 bullish hedge fund positions. ServiceMaster Global Holdings Inc (NYSE:SERV) 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 SERV as the stock returned 32.2% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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