Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published this article and predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards ServiceMaster Global Holdings Inc (NYSE:SERV).
Is ServiceMaster Global Holdings Inc (NYSE:SERV) going to take off soon? Prominent investors are buying. The number of long hedge fund positions inched up by 13 lately. Our calculations also showed that SERV isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). SERV was in 42 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 29 hedge funds in our database with SERV holdings at the end of the previous quarter.
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 S&P 500 ETFs by more than 41 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.
Steven Cohen of Point72 Asset Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we’re going to take a glance at the fresh hedge fund action regarding ServiceMaster Global Holdings Inc (NYSE:SERV).
What have hedge funds been doing with ServiceMaster Global Holdings Inc (NYSE:SERV)?
At the end of the fourth quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 45% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in SERV over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in ServiceMaster Global Holdings Inc (NYSE:SERV) was held by Select Equity Group, which reported holding $343.3 million worth of stock at the end of September. It was followed by Iridian Asset Management with a $184.5 million position. Other investors bullish on the company included Gates Capital Management, Citadel Investment Group, and Point72 Asset Management. 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 5.91% of its 13F portfolio. Lionstone Capital Management is also relatively very bullish on the stock, earmarking 3.47 percent of its 13F equity portfolio to SERV.
As aggregate interest increased, some big names were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, assembled the biggest position in ServiceMaster Global Holdings Inc (NYSE:SERV). Point72 Asset Management had $71.3 million invested in the company at the end of the quarter. John Smith Clark’s Southpoint Capital Advisors also initiated a $38.7 million position during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Thomas E. Claugus’s GMT Capital, and Matthew Knauer and Mina Faltas’s Nokota Management.
Let’s now take a look at hedge fund activity in other stocks similar to ServiceMaster Global Holdings Inc (NYSE:SERV). These stocks are Trex Company, Inc. (NYSE:TREX), Elastic N.V. (NYSE:ESTC), Companhia Energetica Minas Gerais (NYSE:CIG), and Crane Co. (NYSE:CR). This group of stocks’ market values match SERV’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TREX | 20 | 110539 | -1 |
| ESTC | 39 | 919990 | 8 |
| CIG | 9 | 57674 | 1 |
| CR | 23 | 359867 | 0 |
| Average | 22.75 | 362018 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $362 million. That figure was $1198 million in SERV’s case. Elastic N.V. (NYSE:ESTC) is the most popular stock in this table. On the other hand Companhia Energetica Minas Gerais (NYSE:CIG) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks ServiceMaster Global Holdings Inc (NYSE:SERV) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but still managed to beat the market by 1.9 percentage points. Hedge funds were also right about betting on SERV, though not to the same extent, as the stock returned -12.9% during the first quarter (through March 9th) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
