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 Mercury Systems Inc (NASDAQ:MRCY) and determine whether hedge funds skillfully traded this stock.
Is Mercury Systems Inc (NASDAQ:MRCY) a sound investment today? Money managers were in an optimistic mood. The number of bullish hedge fund bets improved by 14 in recent months. Mercury Systems Inc (NASDAQ:MRCY) was in 26 hedge funds' portfolios at the end of June. The all time high for this statistics is 24. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that MRCY 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). There were 12 hedge funds in our database with MRCY holdings at the end of March. Video: Watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Israel Englander of Millennium Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 take a look at the recent hedge fund action encompassing Mercury Systems Inc (NASDAQ:MRCY).
How are hedge funds trading Mercury Systems Inc (NASDAQ:MRCY)?
At the end of the second quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 117% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in MRCY a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Mercury Systems Inc (NASDAQ:MRCY), with a stake worth $8.7 million reported as of the end of September. Trailing Citadel Investment Group was Millennium Management, which amassed a stake valued at $8.3 million. Paloma Partners, D E Shaw, and G2 Investment Partners Management 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 G2 Investment Partners Management allocated the biggest weight to Mercury Systems Inc (NASDAQ:MRCY), around 1.57% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, designating 0.34 percent of its 13F equity portfolio to MRCY.
With a general bullishness amongst the heavyweights, specific money managers have jumped into Mercury Systems Inc (NASDAQ:MRCY) headfirst. Millennium Management, managed by Israel Englander, assembled the most outsized position in Mercury Systems Inc (NASDAQ:MRCY). Millennium Management had $8.3 million invested in the company at the end of the quarter. Donald Sussman's Paloma Partners also made a $7.9 million investment in the stock during the quarter. The other funds with brand new MRCY positions are Noam Gottesman's GLG Partners, Michael Gelband's ExodusPoint Capital, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Mercury Systems Inc (NASDAQ:MRCY) but similarly valued. These stocks are Schneider National, Inc. (NYSE:SNDR), FirstService Corporation (NASDAQ:FSV), Choice Hotels International, Inc. (NYSE:CHH), Stag Industrial Inc (NYSE:STAG), Cemex SAB de CV (NYSE:CX), Clearway Energy, Inc. (NYSE:CWEN), and US Foods Holding Corp. (NYSE:USFD). All of these stocks' market caps match MRCY's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SNDR,17,122089,-5 FSV,11,161212,-1 CHH,22,97339,6 STAG,14,52823,-1 CX,13,157223,1 CWEN,19,233275,2 USFD,35,561892,2 Average,18.7,197979,0.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.7 hedge funds with bullish positions and the average amount invested in these stocks was $198 million. That figure was $67 million in MRCY's case. US Foods Holding Corp. (NYSE:USFD) is the most popular stock in this table. On the other hand FirstService Corporation (TSE:FSV) is the least popular one with only 11 bullish hedge fund positions. Mercury Systems Inc (NASDAQ:MRCY) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MRCY is 71.3. 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. 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 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately MRCY wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MRCY were disappointed as the stock returned -1% during the same time period 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.