Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged during the first quarter. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 40% and 25% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the first 5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Hedge fund interest in Republic Services, Inc. (NYSE:RSG) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Pioneer Natural Resources Company (NYSE:PXD), Halliburton Company (NYSE:HAL), and Agilent Technologies Inc. (NYSE:A) to gather more data points.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
We're going to check out the latest hedge fund action surrounding Republic Services, Inc. (NYSE:RSG).
How have hedgies been trading Republic Services, Inc. (NYSE:RSG)?
At the end of the first quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 26 hedge funds with a bullish position in RSG a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Republic Services, Inc. (NYSE:RSG) was held by AQR Capital Management, which reported holding $162.7 million worth of stock at the end of March. It was followed by GAMCO Investors with a $139.2 million position. Other investors bullish on the company included Two Sigma Advisors, Arrowstreet Capital, and GLG Partners.
Since Republic Services, Inc. (NYSE:RSG) has experienced declining sentiment from hedge fund managers, we can see that there exists a select few money managers that slashed their positions entirely by the end of the third quarter. Interestingly, Richard Chilton's Chilton Investment Company dumped the biggest investment of the 700 funds watched by Insider Monkey, comprising about $81.8 million in stock. Steve Cohen's fund, Point72 Asset Management, also cut its stock, about $51.7 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
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 Pioneer Natural Resources Company (NYSE:PXD), Halliburton Company (NYSE:HAL), Agilent Technologies Inc. (NYSE:A), and AutoZone, Inc. (NYSE:AZO). All of these stocks' market caps are closest to RSG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PXD,55,1686677,-7 HAL,38,854658,4 A,41,2099188,1 AZO,42,1209112,2 Average,44,1462409,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $1462 million. That figure was $596 million in RSG's case. Pioneer Natural Resources Company (NYSE:PXD) is the most popular stock in this table. On the other hand Halliburton Company (NYSE:HAL) is the least popular one with only 38 bullish hedge fund positions. Compared to these stocks Republic Services, Inc. (NYSE:RSG) is even less popular than HAL. Hedge funds clearly dropped the ball on RSG as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on RSG as the stock returned 4.5% during the same period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.