Were Hedge Funds Right About Souring On MSA Safety Incorporated (MSA)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards MSA Safety Incorporated (NYSE:MSA) and determine whether hedge funds skillfully traded this stock.

Is MSA Safety Incorporated (NYSE:MSA) a cheap stock to buy now? Money managers were taking a pessimistic view. The number of long hedge fund bets were cut by 4 lately. Our calculations also showed that MSA 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

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. With all of this in mind let’s take a gander at the key hedge fund action surrounding MSA Safety Incorporated (NYSE:MSA).

What have hedge funds been doing with MSA Safety Incorporated (NYSE:MSA)?

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in MSA over the last 18 quarters. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

The largest stake in MSA Safety Incorporated (NYSE:MSA) was held by Royce & Associates, which reported holding $8.4 million worth of stock at the end of September. It was followed by AQR Capital Management with a $6 million position. Other investors bullish on the company included Citadel Investment Group, Driehaus Capital, and Impax Asset Management. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to MSA Safety Incorporated (NYSE:MSA), around 0.11% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, dishing out 0.1 percent of its 13F equity portfolio to MSA.

Seeing as MSA Safety Incorporated (NYSE:MSA) has witnessed a decline in interest from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedgies who were dropping their positions entirely by the end of the first quarter. It’s worth mentioning that Noam Gottesman’s GLG Partners sold off the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth about $7.1 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund sold off about $1.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 4 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to MSA Safety Incorporated (NYSE:MSA). We will take a look at Coty Inc (NYSE:COTY), Hudson Pacific Properties Inc (NYSE:HPP), US Foods Holding Corp. (NYSE:USFD), and Equity Commonwealth (NYSE:EQC). This group of stocks’ market caps are similar to MSA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $275 million. That figure was $26 million in MSA’s case. Coty Inc (NYSE:COTY) is the most popular stock in this table. On the other hand Hudson Pacific Properties Inc (NYSE:HPP) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks MSA Safety Incorporated (NYSE:MSA) is even less popular than HPP. Hedge funds dodged a bullet by taking a bearish stance towards MSA. Our calculations showed that the top 10 most popular hedge fund stocks 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 but managed to beat the market by 15.5 percentage points. Unfortunately MSA wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); MSA investors were disappointed as the stock returned 13.5% 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 so far in 2020.

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