Should You Avoid Mettler-Toledo International Inc. (MTD)?

Investing in small-cap stocks has historically been a way to outperform the market, as small-cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The one and a half month time period since the end of the third quarter is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by about 4 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually, their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Mettler-Toledo International Inc. (NYSE:MTD).

Mettler-Toledo International Inc. (NYSE:MTD) was in 16 hedge funds’ portfolios at the end of September. MTD has seen a decrease in hedge fund interest in recent months. There were 18 hedge funds in our database with MTD holdings at the end of the previous quarter. Our calculations also showed that MTD isn’t among the 30 most popular stocks among hedge funds.

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 the 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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.

Cliff Asness of AQR Capital Management

Let’s take a look at the new hedge fund action encompassing Mettler-Toledo International Inc. (NYSE:MTD).

Hedge fund activity in Mettler-Toledo International Inc. (NYSE:MTD)

Heading into the fourth quarter of 2018, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards MTD over the last 13 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

More specifically, Select Equity Group was the largest shareholder of Mettler-Toledo International Inc. (NYSE:MTD), with a stake worth $96.1 million reported as of the end of September. Trailing Select Equity Group was AQR Capital Management, which amassed a stake valued at $72.3 million. GLG Partners, Chilton Investment Company, and PDT Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Mettler-Toledo International Inc. (NYSE:MTD) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of fund managers who sold off their entire stakes heading into Q3. Intriguingly, Jim Simons’s Renaissance Technologies cut the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $60.9 million in stock, and Kevin Kotler’s Broadfin Capital was right behind this move, as the fund dropped about $6.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Mettler-Toledo International Inc. (NYSE:MTD) but similarly valued. We will take a look at CoStar Group Inc (NASDAQ:CSGP), Liberty Broadband Corp (NASDAQ:LBRDA), Liberty Broadband Corp (NASDAQ:LBRDK), and Omnicom Group Inc. (NYSE:OMC). This group of stocks’ market caps are closest to MTD’s market cap.

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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 $1419 million. That figure was $326 million in MTD’s case. Liberty Broadband Corp (NASDAQ:LBRDK) is the most popular stock in this table. On the other hand, Omnicom Group Inc. (NYSE:OMC) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Mettler-Toledo International Inc. (NYSE:MTD) is even less popular than OMC. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case, more research is warranted.

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