Hedge Funds Grow Bearish on Mercer International Inc. (MERC) in Q3

The elite funds run by legendary investors such as Dan Loeb and David Tepper make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentive to do the research necessary to beat the market. That’s why we pay close attention to what they think in small-cap stocks. In this article, we take a closer look at Mercer International Inc. (NASDAQ:MERC) from the perspective of those elite funds.

Is Mercer International Inc. (NASDAQ:MERC) the right investment to pursue these days? The smart money is taking a bearish view. The number of long hedge fund positions dropped by 4 in recent months. At the end of this article we will also compare MERC to other stocks including First Potomac Realty Trust (NYSE:FPO), United Financial Bancorp, Inc. (NASDAQ:UBNK), and Silver Spring Networks Inc (NYSE:SSNI) to get a better sense of its popularity.

In the eyes of most stock holders, hedge funds are seen as unimportant, old financial tools of yesteryear. While there are more than 8,000 funds trading at the moment, our researchers look at the upper echelon of this club, about 700 funds. These money managers manage bulk of all hedge funds’ total asset base, and by keeping an eye on their highest performing stock picks, Insider Monkey has discovered several investment strategies that have historically outperformed Mr. Market. Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

With all of this in mind, we’re going to take a gander at the fresh action encompassing Mercer International Inc. (NASDAQ:MERC).

How are hedge funds trading Mercer International Inc. (NASDAQ:MERC)?

Heading into Q4, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a 17% rise from the second quarter. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes significantly (or had already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Gates Capital Management, managed by Jeffrey Gates, holds the most valuable position in Mercer International Inc. (NASDAQ:MERC). Gates Capital Management has a $126.6 million position in the stock, comprising 4.9% of its 13F portfolio. The second-largest stake is held by Knighthead Capital, managed by Tom Wagner and Ara Cohen, which holds a $32.8 million position; the fund has 8.5% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism encompass Jonathan Kolatch’s Redwood Capital Management, Joe Huber’s Huber Capital Management, and Renaissance Technologies.

Due to the fact that Mercer International Inc. (NASDAQ:MERC) has experienced a declination in interest from the smart money, it’s safe to say that there was a specific group of funds that slashed their entire stakes by the end of the third quarter. Intriguingly, Jonathan Lourie and Stuart Fiertz’s Cheyne Capital sold off the largest stake of the 700 funds watched by Insider Monkey, valued at close to $1.1 million in stock, and Glenn Russell Dubin’s Highbridge Capital Management was right behind this move, as the fund dropped about $0.7 million worth of shares. These transactions are intriguing to say the least, as total hedge fund interest fell by 4 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks similar to Mercer International Inc. (NASDAQ:MERC). We will take a look at First Potomac Realty Trust (NYSE:FPO), United Financial Bancorp, Inc. (NASDAQ:UBNK), Silver Spring Networks Inc (NYSE:SSNI), and Zhaopin Ltd (ADR) (NYSE:ZPIN). This group of stocks’ market values resemble MERC’s market value.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $218 million in MERC’s case. Silver Spring Networks Inc (NYSE:SSNI) is the most popular stock in this table. On the other hand Zhaopin Ltd (ADR) (NYSE:ZPIN) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Mercer International Inc. (NASDAQ:MERC) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.