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Is MSM A Good Stock To Buy Now According To Hedge Funds?

Debasis Saha
·7 min read

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in MSC Industrial Direct Co Inc (NYSE:MSM)? The smart money sentiment can provide an answer to this question.

Is MSM a good stock to buy now? Money managers were becoming less confident. The number of long hedge fund positions were cut by 8 in recent months. MSC Industrial Direct Co Inc (NYSE:MSM) was in 22 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 30. Our calculations also showed that MSM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 30 hedge funds in our database with MSM holdings at the end of June. 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 66 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.

Richard Pzena - Pzena Investment Management
Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. With all of this in mind let's take a gander at the new hedge fund action surrounding MSC Industrial Direct Co Inc (NYSE:MSM).

Do Hedge Funds Think MSM Is A Good Stock To Buy Now?

At the end of September, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MSM over the last 21 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MSM A Good Stock To Buy?
Is MSM A Good Stock To Buy?

More specifically, Yacktman Asset Management was the largest shareholder of MSC Industrial Direct Co Inc (NYSE:MSM), with a stake worth $82.9 million reported as of the end of September. Trailing Yacktman Asset Management was Paradice Investment Management, which amassed a stake valued at $55.8 million. AQR Capital Management, Royce & Associates, and Pzena Investment 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 Paradice Investment Management allocated the biggest weight to MSC Industrial Direct Co Inc (NYSE:MSM), around 4.04% of its 13F portfolio. Value Holdings LP is also relatively very bullish on the stock, earmarking 2.13 percent of its 13F equity portfolio to MSM.

Because MSC Industrial Direct Co Inc (NYSE:MSM) has experienced bearish sentiment from hedge fund managers, it's easy to see that there were a few money managers who were dropping their entire stakes in the third quarter. At the top of the heap, Ken Griffin's Citadel Investment Group said goodbye to the largest position of the 750 funds followed by Insider Monkey, comprising an estimated $74.7 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund dropped about $20.7 million worth. These moves are important to note, as aggregate hedge fund interest fell by 8 funds in the third quarter.

Let's check out hedge fund activity in other stocks similar to MSC Industrial Direct Co Inc (NYSE:MSM). We will take a look at The Hanover Insurance Group, Inc. (NYSE:THG), Texas Pacific Land Trust (NYSE:TPL), The Hain Celestial Group, Inc. (NASDAQ:HAIN), Highwoods Properties Inc (NYSE:HIW), Grupo Televisa SAB (NYSE:TV), Grupo Aeroportuario del Sureste (NYSE:ASR), and Spirit Realty Capital Inc (NYSE:SRC). This group of stocks' market caps match MSM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position THG,27,142850,2 TPL,13,762288,-1 HAIN,21,892531,-3 HIW,25,262650,-5 TV,17,499490,-4 ASR,10,51222,-1 SRC,16,136469,-2 Average,18.4,392500,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.4 hedge funds with bullish positions and the average amount invested in these stocks was $393 million. That figure was $267 million in MSM's case. The Hanover Insurance Group, Inc. (NYSE:THG) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Sureste (NYSE:ASR) is the least popular one with only 10 bullish hedge fund positions. MSC Industrial Direct Co Inc (NYSE:MSM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MSM is 54.3. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on MSM as the stock returned 37.5% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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