Should You Avoid MTS Systems Corporation (MTSC)?

Reputable billionaire investors such as Nelson Peltz and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

MTS Systems Corporation (NASDAQ:MTSC) was in 17 hedge funds’ portfolios at the end of September. MTSC investors should be aware of a decrease in hedge fund interest recently. There were 20 hedge funds in our database with MTSC holdings at the end of the previous quarter. At the end of this article we will also compare MTSC to other stocks including FormFactor, Inc. (NASDAQ:FORM), Tailored Brands Inc (NYSE:TLRD), and Raptor Pharmaceutical Corp. (NASDAQ:RPTP) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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

At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, down by 15% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MTSC over the last 5 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Ariel Investments, led by John W. Rogers, holds the most valuable position in MTS Systems Corporation (NASDAQ:MTSC). Ariel Investments has a $77.1 million position in the stock. Sitting at the No. 2 spot is Levin Capital Strategies, led by John A. Levin, which holds a $24.1 million position. Other peers that hold long positions consist of Jim Simons’ Renaissance Technologies, Ken Griffin’s Citadel Investment Group and Paul Marshall and Ian Wace’s Marshall Wace LLP. 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 that we’ve mentioned the most bullish investors, let’s also take a look at some funds that dumped their entire stakes in the stock during the third quarter. Intriguingly, D. E. Shaw’s D E Shaw dumped the biggest stake of all the hedgies followed by Insider Monkey, totaling close to $1.5 million in stock. Cliff Asness’ fund, AQR Capital Management, also cut its stock, about $0.9 million worth.

Let’s also examine hedge fund activity in other stocks similar to MTS Systems Corporation (NASDAQ:MTSC). These stocks are FormFactor, Inc. (NASDAQ:FORM), Tailored Brands Inc (NYSE:TLRD), Raptor Pharmaceutical Corp. (NASDAQ:RPTP), and Bankrate Inc (NYSE:RATE). This group of stocks’ market values match MTSC’s market value.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $127 million. That figure was $150 million in MTSC’s case. Tailored Brands Inc (NYSE:TLRD) is the most popular stock in this table. On the other hand FormFactor, Inc. (NASDAQ:FORM) is the least popular one with only 16 bullish hedge fund positions. MTS Systems Corporation (NASDAQ:MTSC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard TLRD might be a better candidate to consider taking a long position in.

Disclosure: None