Should I Avoid Republic Services, Inc. (RSG)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Republic Services, Inc. (NYSE:RSG)? The smart money sentiment can provide an answer to this question.

Republic Services, Inc. (NYSE:RSG) investors should pay attention to a decrease in enthusiasm from smart money lately. Republic Services, Inc. (NYSE:RSG) was in 34 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 37. There were 36 hedge funds in our database with RSG holdings at the end of March. Our calculations also showed that RSG isn’t among the 30 most popular stocks among hedge funds (click 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 S&P 500 ETFs by 79 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.

Richard Chilton of Chilton Investment Company

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to take a peek at the latest hedge fund action encompassing Republic Services, Inc. (NYSE:RSG).

Do Hedge Funds Think RSG Is A Good Stock To Buy Now?

At Q2’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in RSG over the last 24 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of Republic Services, Inc. (NYSE:RSG), with a stake worth $174.5 million reported as of the end of June. Trailing AQR Capital Management was Chilton Investment Company, which amassed a stake valued at $145.4 million. Adage Capital Management, Millennium Management, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Appian Way Asset Management allocated the biggest weight to Republic Services, Inc. (NYSE:RSG), around 5.52% of its 13F portfolio. Covalis Capital is also relatively very bullish on the stock, designating 3.84 percent of its 13F equity portfolio to RSG.

Judging by the fact that Republic Services, Inc. (NYSE:RSG) has faced bearish sentiment from the smart money, it’s easy to see that there was a specific group of money managers who sold off their entire stakes last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the largest investment of the 750 funds monitored by Insider Monkey, worth an estimated $4 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund dumped about $1.7 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 2 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Republic Services, Inc. (NYSE:RSG). We will take a look at Otis Worldwide Corporation (NYSE:OTIS), SBA Communications Corporation (NASDAQ:SBAC), Corning Incorporated (NYSE:GLW), Welltower Inc. (NYSE:WELL), Nutrien Ltd. (NYSE:NTR), KKR & Co Inc. (NYSE:KKR), and LyondellBasell Industries NV (NYSE:LYB). All of these stocks’ market caps resemble RSG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.9 hedge funds with bullish positions and the average amount invested in these stocks was $1764 million. That figure was $1289 million in RSG’s case. KKR & Co Inc. (NYSE:KKR) is the most popular stock in this table. On the other hand Welltower Inc. (NYSE:WELL) is the least popular one with only 19 bullish hedge fund positions. Republic Services, Inc. (NYSE:RSG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RSG is 52. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 21.8% in 2021 through October 11th and still beat the market by 4.4 percentage points. A small number of hedge funds were also right about betting on RSG as the stock returned 15.1% since the end of the second quarter (through 10/11) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.

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