Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like McGrath RentCorp (NASDAQ:MGRC).
McGrath RentCorp (NASDAQ:MGRC) has seen an increase in activity from the world’s largest hedge funds lately. Our calculations also showed that MGRC 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
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. Let’s analyze the recent hedge fund action encompassing McGrath RentCorp (NASDAQ:MGRC).
How are hedge funds trading McGrath RentCorp (NASDAQ:MGRC)?
At Q3’s end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in MGRC a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Renaissance Technologies has the largest position in McGrath RentCorp (NASDAQ:MGRC), worth close to $37 million, amounting to less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is Ken Grossman and Glen Schneider of SG Capital Management, with a $25.3 million position; 4.8% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish contain David Park’s Headlands Capital, Chuck Royce’s Royce & Associates and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Headlands Capital allocated the biggest weight to McGrath RentCorp (NASDAQ:MGRC), around 13.17% of its 13F portfolio. SG Capital Management is also relatively very bullish on the stock, earmarking 4.79 percent of its 13F equity portfolio to MGRC.
As aggregate interest increased, key hedge funds have been driving this bullishness. Driehaus Capital, managed by Richard Driehaus, initiated the most outsized position in McGrath RentCorp (NASDAQ:MGRC). Driehaus Capital had $3.3 million invested in the company at the end of the quarter. Josh Goldberg’s G2 Investment Partners Management also initiated a $1.2 million position during the quarter. The other funds with brand new MGRC positions are Donald Sussman’s Paloma Partners and Steve Cohen’s Point72 Asset Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as McGrath RentCorp (NASDAQ:MGRC) but similarly valued. We will take a look at Zuora, Inc. (NYSE:ZUO), Central Garden & Pet Co (NASDAQ:CENT), Hailiang Education Group Inc. (NASDAQ:HLG), and WestAmerica Bancorp. (NASDAQ:WABC). This group of stocks’ market caps match MGRC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ZUO | 23 | 153629 | 4 |
| CENT | 23 | 154253 | 4 |
| HLG | 3 | 7374 | 1 |
| WABC | 11 | 22436 | 1 |
| Average | 15 | 84423 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $158 million in MGRC’s case. Zuora, Inc. (NYSE:ZUO) is the most popular stock in this table. On the other hand Hailiang Education Group Inc. (NASDAQ:HLG) is the least popular one with only 3 bullish hedge fund positions. McGrath RentCorp (NASDAQ:MGRC) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on MGRC, though not to the same extent, as the stock returned 6% during the first two months of the fourth quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
