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Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Mueller Industries, Inc. (NYSE:MLI).
Mueller Industries, Inc. (NYSE:MLI) investors should pay attention to a decrease in enthusiasm from smart money lately. Our calculations also showed that MLI 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 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 32 percentage points since May 2014 through March 12, 2019 (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.
Let's check out the recent hedge fund action encompassing Mueller Industries, Inc. (NYSE:MLI).
Hedge fund activity in Mueller Industries, Inc. (NYSE:MLI)
At the end of the fourth quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards MLI over the last 14 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, GAMCO Investors, managed by Mario Gabelli, holds the biggest position in Mueller Industries, Inc. (NYSE:MLI). GAMCO Investors has a $100.1 million position in the stock, comprising 0.8% of its 13F portfolio. On GAMCO Investors's heels is Royce & Associates, led by Chuck Royce, holding a $22.5 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions comprise Ken Fisher's Fisher Asset Management, D. E. Shaw's D E Shaw and Ken Griffin's Citadel Investment Group.
Due to the fact that Mueller Industries, Inc. (NYSE:MLI) has experienced falling interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedge funds who were dropping their entire stakes in the third quarter. At the top of the heap, Joel Greenblatt's Gotham Asset Management sold off the largest position of all the hedgies followed by Insider Monkey, totaling an estimated $0.8 million in stock, and Roger Ibbotson's Zebra Capital Management was right behind this move, as the fund dumped about $0.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Mueller Industries, Inc. (NYSE:MLI). We will take a look at Rush Enterprises, Inc. (NASDAQ:RUSHA), Kronos Worldwide, Inc. (NYSE:KRO), Park National Corporation (NYSEAMEX:PRK), and QEP Resources Inc (NYSE:QEP). This group of stocks' market caps are similar to MLI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RUSHA,21,95354,1 KRO,14,38841,-3 PRK,7,12521,-5 QEP,25,219271,3 Average,16.75,91497,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $142 million in MLI's case. QEP Resources Inc (NYSE:QEP) is the most popular stock in this table. On the other hand Park National Corporation (NYSEAMEX:PRK) is the least popular one with only 7 bullish hedge fund positions. Mueller Industries, Inc. (NYSE:MLI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. A small number of hedge funds were also right about betting on MLI as the stock returned 34% and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
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