While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Mercury General Corporation (NYSE:MCY).
Mercury General Corporation (NYSE:MCY) has seen an increase in hedge fund sentiment in recent months. MCY was in 20 hedge funds’ portfolios at the end of September. There were 16 hedge funds in our database with MCY positions at the end of the previous quarter. Our calculations also showed that MCY isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Cliff Asness of AQR Capital Management
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the key hedge fund action surrounding Mercury General Corporation (NYSE:MCY).
How have hedgies been trading Mercury General Corporation (NYSE:MCY)?
At Q3’s end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from one quarter earlier. By comparison, 18 hedge funds held shares or bullish call options in MCY a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the largest position in Mercury General Corporation (NYSE:MCY), worth close to $113.7 million, amounting to 0.1% of its total 13F portfolio. The second most bullish fund manager is AQR Capital Management, managed by Cliff Asness, which holds a $23.9 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism include John D. Gillespie’s Prospector Partners, Noam Gottesman’s GLG Partners and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to Mercury General Corporation (NYSE:MCY), around 1.74% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, earmarking 0.17 percent of its 13F equity portfolio to MCY.
Consequently, key money managers have jumped into Mercury General Corporation (NYSE:MCY) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the largest position in Mercury General Corporation (NYSE:MCY). Balyasny Asset Management had $3.7 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace also made a $1.2 million investment in the stock during the quarter. The other funds with brand new MCY positions are Paul Tudor Jones’s Tudor Investment Corp and Matthew Tewksbury’s Stevens Capital Management.
Let’s go over hedge fund activity in other stocks similar to Mercury General Corporation (NYSE:MCY). These stocks are Sunstone Hotel Investors Inc (NYSE:SHO), Appian Corporation (NASDAQ:APPN), Olin Corporation (NYSE:OLN), and Agree Realty Corporation (NYSE:ADC). This group of stocks’ market valuations resemble MCY’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SHO | 21 | 221672 | 0 |
| APPN | 17 | 474518 | 5 |
| OLN | 27 | 489655 | 4 |
| ADC | 9 | 113090 | -2 |
| Average | 18.5 | 324734 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $325 million. That figure was $201 million in MCY’s case. Olin Corporation (NYSE:OLN) is the most popular stock in this table. On the other hand Agree Realty Corporation (NYSE:ADC) is the least popular one with only 9 bullish hedge fund positions. Mercury General Corporation (NYSE:MCY) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MCY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MCY were disappointed as the stock returned -12.3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
