Were Hedge Funds Right About Ditching Mercer International Inc. (MERC)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtMercer International Inc. (NASDAQ:MERC) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Mercer International Inc. (NASDAQ:MERC) investors should pay attention to a decrease in enthusiasm from smart money lately. MERC was in 10 hedge funds’ portfolios at the end of March. There were 14 hedge funds in our database with MERC holdings at the end of the previous quarter. Our calculations also showed that MERC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

To most stock holders, hedge funds are assumed to be slow, outdated financial tools of the past. While there are greater than 8000 funds with their doors open today, Our researchers hone in on the top tier of this group, about 850 funds. Most estimates calculate that this group of people oversee bulk of all hedge funds’ total asset base, and by keeping track of their best equity investments, Insider Monkey has figured out numerous investment strategies that have historically beaten Mr. Market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s review the fresh hedge fund action encompassing Mercer International Inc. (NASDAQ:MERC).

Hedge fund activity in Mercer International Inc. (NASDAQ:MERC)

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in MERC a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

The largest stake in Mercer International Inc. (NASDAQ:MERC) was held by Gates Capital Management, which reported holding $36 million worth of stock at the end of September. It was followed by Redwood Capital Management with a $15 million position. Other investors bullish on the company included Royce & Associates, Knighthead Capital, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Redwood Capital Management allocated the biggest weight to Mercer International Inc. (NASDAQ:MERC), around 2.74% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, designating 2.37 percent of its 13F equity portfolio to MERC.

Since Mercer International Inc. (NASDAQ:MERC) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedge funds who were dropping their positions entirely last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dumped the biggest investment of the “upper crust” of funds watched by Insider Monkey, worth about $1.3 million in stock. Donald Sussman’s fund, Paloma Partners, also sold off its stock, about $0.3 million worth. These moves are important to note, as total hedge fund interest was cut by 4 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Mercer International Inc. (NASDAQ:MERC). These stocks are Origin Bancorp, Inc. (NASDAQ:OBNK), Dine Brands Global, Inc. (NYSE:DIN), M/I Homes Inc (NYSE:MHO), and Himax Technologies, Inc. (NASDAQ:HIMX). This group of stocks’ market valuations match MERC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $40 million. That figure was $85 million in MERC’s case. Dine Brands Global, Inc. (NYSE:DIN) is the most popular stock in this table. On the other hand Origin Bancorp, Inc. (NASDAQ:OBNK) is the least popular one with only 5 bullish hedge fund positions. Mercer International Inc. (NASDAQ:MERC) 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately MERC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MERC investors were disappointed as the stock returned 13.6% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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