McGrath RentCorp (MGRC): Are Hedge Funds Right About This Stock?

Hedge fund managers like David Einhorn, Dan Loeb, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: McGrath RentCorp (NASDAQ:MGRC).

McGrath RentCorp (NASDAQ:MGRC) investors should pay attention to an increase in support from the world’s most successful money managers in recent months. There were 15 hedge funds in our database with MGRC holdings at the end of September. At the end of this article we will also compare MGRC to other stocks including Alamo Group, Inc. (NYSE:ALG), Bob Evans Farms Inc (NASDAQ:BOBE), and Virtus Investment Partners Inc (NASDAQ:VRTS) to get a better sense of its popularity.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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Keeping this in mind, let’s view the latest action regarding McGrath RentCorp (NASDAQ:MGRC).

How are hedge funds trading McGrath RentCorp (NASDAQ:MGRC)?

At the end of the third quarter, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, compared to 12 funds a quarter earlier. By comparison, 9 hedge funds held shares or bullish call options in MGRC heading into this year. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, one of the largest hedge funds in the world has the biggest position in McGrath RentCorp (NASDAQ:MGRC), worth close to $10.5 million, amounting to less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is Royce & Associates, led by Chuck Royce, which holds a $10.2 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions contain David Park’s Headlands Capital, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Millennium Management, one of the 10 largest hedge funds in the world. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Now, some big names have been driving this bullishness. Stevens Capital Management, led by Matthew Tewksbury, created the most outsized position in McGrath RentCorp (NASDAQ:MGRC). Stevens Capital Management had $0.3 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $0.3 million investment in the stock during the quarter. The other funds with brand new MGRC positions are Robert B. Gillam’s McKinley Capital Management and Glenn Russell Dubin’s Highbridge Capital 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. These stocks are Alamo Group, Inc. (NYSE:ALG), Bob Evans Farms Inc (NASDAQ:BOBE), Virtus Investment Partners Inc (NASDAQ:VRTS), and Saia Inc (NASDAQ:SAIA). This group of stocks’ market caps are similar to MGRC’s market cap.

As you can see these stocks had an average of 12 funds with bullish positions and the average amount invested in these stocks was $106 million, which is higher than the $43 million figure in MGRC’s case. Bob Evans Farms Inc (NASDAQ:BOBE) is the most popular stock in this table, while Alamo Group, Inc. (NYSE:ALG) is the least popular one with only 10 funds holding shares. McGrath RentCorp (NASDAQ:MGRC) 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. In this regard Bob Evans Farms Inc (NASDAQ:BOBE) might be a better candidate to consider taking a long position in.

Disclosure: none