U.S. Markets closed

Hedge Funds Have Never Been Less Bullish On Mercer International Inc. (NASDAQ:MERC)

Faizan Farooque

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Mercer International Inc. (NASDAQ:MERC).

Is Mercer International Inc. (NASDAQ:MERC) ready to rally soon? Money managers are turning less bullish. The number of long hedge fund positions dropped by 3 recently. Our calculations also showed that MERC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/caption]

Chuck Royce

We leave no stone unturned when looking for the next great investment idea. For example, Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. We're going to go over the key hedge fund action encompassing Mercer International Inc. (NASDAQ:MERC).

Hedge fund activity in Mercer International Inc. (NASDAQ:MERC)

At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in MERC a year ago. With hedge funds' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Is Mercer International Inc. (NASDAQ:MERC) Going to Burn These Hedge Funds?

More specifically, Gates Capital Management was the largest shareholder of Mercer International Inc. (NASDAQ:MERC), with a stake worth $46.3 million reported as of the end of September. Trailing Gates Capital Management was Redwood Capital Management, which amassed a stake valued at $26 million. Knighthead Capital, Royce & Associates, and Renaissance Technologies 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, Knighthead Capital allocated the biggest weight to Mercer International Inc. (NASDAQ:MERC), around 3.43% of its 13F portfolio. Redwood Capital Management is also relatively very bullish on the stock, dishing out 2.83 percent of its 13F equity portfolio to MERC.

Seeing as Mercer International Inc. (NASDAQ:MERC) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there exist a select few money managers that decided to sell off their entire stakes last quarter. Intriguingly, Lee Ainslie's Maverick Capital dumped the biggest stake of the 750 funds monitored by Insider Monkey, worth about $5.3 million in stock, and Ernest Chow and Jonathan Howe's Sensato Capital Management was right behind this move, as the fund dropped about $1.8 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 3 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to Mercer International Inc. (NASDAQ:MERC). These stocks are Zumiez Inc. (NASDAQ:ZUMZ), Cango Inc. (NYSE:CANG), istar Inc (NYSE:STAR), and Central Pacific Financial Corp. (NYSE:CPF). All of these stocks' market caps resemble MERC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZUMZ,18,76921,2 CANG,1,306,0 STAR,14,91186,9 CPF,15,74851,3 Average,12,60816,3.5 [/table]

View the table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $61 million. That figure was $142 million in MERC's case. Zumiez Inc. (NASDAQ:ZUMZ) is the most popular stock in this table. On the other hand, Cango Inc. (NYSE:CANG) is the least popular one with only 1 bullish hedge fund positions. Mercer International Inc. (NASDAQ:MERC) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MERC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MERC were disappointed as the stock returned -0.1% during the fourth quarter (through the end of November) 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.

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

Related Content