It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Martin Marietta Materials, Inc. (NYSE:MLM).
Martin Marietta Materials, Inc. (NYSE:MLM) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 40 hedge funds’ portfolios at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Omnicom Group Inc. (NYSE:OMC), Arch Capital Group Ltd. (NASDAQ:ACGL), and Equifax Inc. (NYSE:EFX) to gather more data points. Our calculations also showed that MLM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.
John Armitage of Egerton Capital
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s review the recent hedge fund action encompassing Martin Marietta Materials, Inc. (NYSE:MLM).
Hedge fund activity in Martin Marietta Materials, Inc. (NYSE:MLM)
Heading into the fourth quarter of 2019, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in MLM a year ago. 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 Martin Marietta Materials, Inc. (NYSE:MLM) was held by Select Equity Group, which reported holding $770.5 million worth of stock at the end of September. It was followed by Gardner Russo & Gardner with a $476.3 million position. Other investors bullish on the company included Egerton Capital Limited, Alkeon Capital Management, and Iridian Asset Management. In terms of the portfolio weights assigned to each position RR Partners allocated the biggest weight to Martin Marietta Materials, Inc. (NYSE:MLM), around 9.07% of its 13F portfolio. Red Cedar Management is also relatively very bullish on the stock, earmarking 8.84 percent of its 13F equity portfolio to MLM.
Seeing as Martin Marietta Materials, Inc. (NYSE:MLM) has experienced declining sentiment from hedge fund managers, it’s safe to say that there exists a select few money managers that elected to cut their entire stakes heading into Q4. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest investment of all the hedgies watched by Insider Monkey, totaling an estimated $35.7 million in stock, and John Lykouretzos’s Hoplite Capital Management was right behind this move, as the fund dropped about $19.7 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Martin Marietta Materials, Inc. (NYSE:MLM) but similarly valued. We will take a look at Omnicom Group Inc. (NYSE:OMC), Arch Capital Group Ltd. (NASDAQ:ACGL), Equifax Inc. (NYSE:EFX), and DISH Network Corp. (NASDAQ:DISH). This group of stocks’ market values are closest to MLM’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OMC | 24 | 478571 | 1 |
| ACGL | 21 | 1306954 | -2 |
| EFX | 26 | 1728610 | -8 |
| DISH | 36 | 1531248 | 4 |
| Average | 26.75 | 1261346 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $1261 million. That figure was $2550 million in MLM’s case. DISH Network Corp. (NASDAQ:DISH) is the most popular stock in this table. On the other hand Arch Capital Group Ltd. (NASDAQ:ACGL) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Martin Marietta Materials, Inc. (NYSE:MLM) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on MLM as the stock returned 59.2% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
