It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. 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. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. 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 Republic Services, Inc. (NYSE:RSG).
Is Republic Services, Inc. (NYSE:RSG) worth your attention right now? Investors who are in the know are getting more optimistic. The number of bullish hedge fund bets inched up by 7 lately. Our calculations also showed that RSG isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). RSG was in 31 hedge funds' portfolios at the end of September. There were 24 hedge funds in our database with RSG holdings at the end of the previous quarter.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_30668" align="aligncenter" width="478"] Richard Chilton of Chilton Investment Company[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to take a peek at the fresh hedge fund action encompassing Republic Services, Inc. (NYSE:RSG).
Hedge fund activity in Republic Services, Inc. (NYSE:RSG)
At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from the second quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in RSG a year ago. With the smart money's sentiment swirling, there exists a few key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Republic Services, Inc. (NYSE:RSG), with a stake worth $157.6 million reported as of the end of September. Trailing AQR Capital Management was GAMCO Investors, which amassed a stake valued at $130.9 million. Chilton Investment Company, Two Sigma Advisors, and Marshall Wace 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 Chilton Investment Company allocated the biggest weight to Republic Services, Inc. (NYSE:RSG), around 3.02% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, setting aside 1.62 percent of its 13F equity portfolio to RSG.
As industrywide interest jumped, some big names were leading the bulls' herd. Renaissance Technologies, assembled the most outsized position in Republic Services, Inc. (NYSE:RSG). Renaissance Technologies had $20.3 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser's Magnetar Capital also made a $2.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael Gelband's ExodusPoint Capital, Matthew Tewksbury's Stevens Capital Management, and Benjamin A. Smith's Laurion Capital Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Republic Services, Inc. (NYSE:RSG) but similarly valued. We will take a look at Chunghwa Telecom Co., Ltd (NYSE:CHT), Eversource Energy (NYSE:ES), Mercadolibre Inc (NASDAQ:MELI), and CRH PLC (NYSE:CRH). All of these stocks' market caps are similar to RSG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHT,5,117483,2 ES,19,739026,-2 MELI,45,3156793,-7 CRH,9,129764,2 Average,19.5,1035767,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $1036 million. That figure was $625 million in RSG's case. Mercadolibre Inc (NASDAQ:MELI) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 5 bullish hedge fund positions. Republic Services, Inc. (NYSE:RSG) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately RSG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RSG were disappointed as the stock returned 25.7% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.