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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Republic Services, Inc. (NYSE:RSG) and determine whether hedge funds had an edge regarding this stock.
Republic Services, Inc. (NYSE:RSG) was in 37 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 35. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. RSG investors should pay attention to an increase in support from the world's most elite money managers lately. There were 32 hedge funds in our database with RSG holdings at the end of March. Our calculations also showed that RSG 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.
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 S&P 500 ETFs by more than 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 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let's check out the new hedge fund action encompassing Republic Services, Inc. (NYSE:RSG).
How have hedgies been trading Republic Services, Inc. (NYSE:RSG)?
At the end of June, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the first quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in RSG a year ago. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the largest position in Republic Services, Inc. (NYSE:RSG). AQR Capital Management has a $130.9 million position in the stock, comprising 0.2% of its 13F portfolio. On AQR Capital Management's heels is Richard Chilton of Chilton Investment Company, with a $99.1 million position; 3.3% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish contain Israel Englander's Millennium Management, Mario Gabelli's GAMCO Investors and Renaissance Technologies. In terms of the portfolio weights assigned to each position Chilton Investment Company allocated the biggest weight to Republic Services, Inc. (NYSE:RSG), around 3.27% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, setting aside 1.8 percent of its 13F equity portfolio to RSG.
Now, key money managers have jumped into Republic Services, Inc. (NYSE:RSG) headfirst. Point72 Asset Management, managed by Steve Cohen, initiated the biggest position in Republic Services, Inc. (NYSE:RSG). Point72 Asset Management had $34.6 million invested in the company at the end of the quarter. Brandon Haley's Holocene Advisors also made a $3.6 million investment in the stock during the quarter. The following funds were also among the new RSG investors: Paul Tudor Jones's Tudor Investment Corp, Ran Pang's Quantamental Technologies, and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.
Let's go over 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 KKR & Co Inc. (NYSE:KKR), Datadog, Inc. (NASDAQ:DDOG), Hormel Foods Corporation (NYSE:HRL), PACCAR Inc (NASDAQ:PCAR), AFLAC Incorporated (NYSE:AFL), Suncor Energy Inc. (NYSE:SU), and Sirius XM Holdings Inc (NASDAQ:SIRI). This group of stocks' market values match RSG's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KKR,45,3339623,-3 DDOG,57,2363237,13 HRL,27,440889,-1 PCAR,30,244385,-8 AFL,34,588093,2 SU,29,845050,-1 SIRI,42,1136784,6 Average,37.7,1279723,1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 37.7 hedge funds with bullish positions and the average amount invested in these stocks was $1280 million. That figure was $822 million in RSG's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 27 bullish hedge fund positions. Republic Services, Inc. (NYSE:RSG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RSG is 56.7. 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 negative signal and 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately RSG wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RSG investors were disappointed as the stock returned 13% since Q2 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 in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.