Were These Hedge Funds Wrong About Dumping United Rentals, Inc. (URI)?

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 United Rentals, Inc. (NYSE:URI)? The smart money sentiment can provide an answer to this question.

United Rentals, Inc. (NYSE:URI) investors should pay attention to a decrease in enthusiasm from smart money in recent months. United Rentals, Inc. (NYSE:URI) was in 40 hedge funds’ portfolios at the end of June. The all time high for this statistics is 59. There were 43 hedge funds in our database with URI holdings at the end of March. Our calculations also showed that URI isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 plenty of metrics investors put to use to assess stocks. Two of the most under-the-radar metrics are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the best picks of the top hedge fund managers can beat the broader indices by a significant margin (see the details here).

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Keeping this in mind let’s view the fresh hedge fund action regarding United Rentals, Inc. (NYSE:URI).

How have hedgies been trading United Rentals, Inc. (NYSE:URI)?

Heading into the third quarter of 2020, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in URI over the last 20 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Among these funds, Lyrical Asset Management held the most valuable stake in United Rentals, Inc. (NYSE:URI), which was worth $276.6 million at the end of the third quarter. On the second spot was Theleme Partners which amassed $234.9 million worth of shares. Arrowstreet Capital, Glenview Capital, and Holocene 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 Theleme Partners allocated the biggest weight to United Rentals, Inc. (NYSE:URI), around 11.08% of its 13F portfolio. Elm Ridge Capital is also relatively very bullish on the stock, earmarking 8 percent of its 13F equity portfolio to URI.

Due to the fact that United Rentals, Inc. (NYSE:URI) has faced declining sentiment from hedge fund managers, logic holds that there were a few hedgies who were dropping their positions entirely by the end of the second quarter. It’s worth mentioning that Amit Nitin Doshi’s Harbor Spring Capital said goodbye to the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $33.2 million in stock. Ryan Caldwell’s fund, Chiron Investment Management, also dropped its stock, about $11.9 million worth. These moves are important to note, as aggregate hedge fund interest fell by 3 funds by the end of the second quarter.

Let’s check out hedge fund activity in other stocks similar to United Rentals, Inc. (NYSE:URI). We will take a look at Booz Allen Hamilton Holding Corporation (NYSE:BAH), Cable One Inc (NYSE:CABO), Regions Financial Corporation (NYSE:RF), Credicorp Ltd. (NYSE:BAP), C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), Monolithic Power Systems, Inc. (NASDAQ:MPWR), and argenx SE (NASDAQ:ARGX). This group of stocks’ market caps resemble URI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.9 hedge funds with bullish positions and the average amount invested in these stocks was $489 million. That figure was $890 million in URI’s case. Monolithic Power Systems, Inc. (NASDAQ:MPWR) is the most popular stock in this table. On the other hand Credicorp Ltd. (NYSE:BAP) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks United Rentals, Inc. (NYSE:URI) is more popular among hedge funds. Our overall hedge fund sentiment score for URI is 72.3. 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 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 returned 23% in 2020 through October 30th but still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on URI as the stock returned 19.6% since the end of June (through 10/30) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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