Is MTS Systems Corporation (MTSC) Going to Burn These Hedge Funds?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of MTS Systems Corporation (NASDAQ:MTSC).

Is MTS Systems Corporation (NASDAQ:MTSC) the right pick for your portfolio? Investors who are in the know are in a bullish mood. The number of long hedge fund positions increased by 4 in recent months. Our calculations also showed that MTSC 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.

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 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. 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.

Fred DiSanto of Ancora Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology’s influence will go beyond online payments. So, we are checking out this futurist’s moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a peek at the new hedge fund action encompassing MTS Systems Corporation (NASDAQ:MTSC).

What have hedge funds been doing with MTS Systems Corporation (NASDAQ:MTSC)?

Heading into the second quarter of 2020, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in MTSC over the last 18 quarters. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

The largest stake in MTS Systems Corporation (NASDAQ:MTSC) was held by Ariel Investments, which reported holding $12.1 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $5.7 million position. Other investors bullish on the company included Citadel Investment Group, Millennium Management, and DG Capital Management. In terms of the portfolio weights assigned to each position DG Capital Management allocated the biggest weight to MTS Systems Corporation (NASDAQ:MTSC), around 4.34% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, setting aside 0.21 percent of its 13F equity portfolio to MTSC.

Now, key money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, created the most outsized position in MTS Systems Corporation (NASDAQ:MTSC). Millennium Management had $3.4 million invested in the company at the end of the quarter. Dov Gertzulin’s DG Capital Management also made a $2.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Greg Eisner’s Engineers Gate Manager, Frederick DiSanto’s Ancora Advisors, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as MTS Systems Corporation (NASDAQ:MTSC) but similarly valued. We will take a look at Heidrick & Struggles International, Inc. (NASDAQ:HSII), Denny’s Corporation (NASDAQ:DENN), Bluegreen Vacations Corporation (NYSE:BXG), and QCR Holdings, Inc. (NASDAQ:QCRH). This group of stocks’ market values are similar to MTSC’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $43 million. That figure was $34 million in MTSC’s case. Denny’s Corporation (NASDAQ:DENN) is the most popular stock in this table. On the other hand Bluegreen Vacations Corporation (NYSE:BXG) is the least popular one with only 7 bullish hedge fund positions. MTS Systems Corporation (NASDAQ:MTSC) 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 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately MTSC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MTSC were disappointed as the stock returned -26.8% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 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.