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Were Hedge Funds Right About Dumping Monro Muffler Brake Inc (MNRO)?

Reymerlyn Martin

Is Monro Muffler Brake Inc (NASDAQ:MNRO) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Monro Muffler Brake Inc (NASDAQ:MNRO) has experienced a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that MNRO isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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.

Paul Marshall Marshall Wace

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the latest hedge fund action surrounding Monro Muffler Brake Inc (NASDAQ:MNRO).

Hedge fund activity in Monro Muffler Brake Inc (NASDAQ:MNRO)

At the end of the second quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in MNRO a year ago. With the smart money's capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

MNRO_oct2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Arlington Value Capital, managed by Allan Mecham and Ben Raybould, holds the biggest position in Monro Muffler Brake Inc (NASDAQ:MNRO). Arlington Value Capital has a $140 million position in the stock, comprising 9.5% of its 13F portfolio. Sitting at the No. 2 spot is Marshall Wace LLP, led by Paul Marshall and Ian Wace, holding a $34.9 million position; 0.3% of its 13F portfolio is allocated to the stock. Some other professional money managers that are bullish encompass Chuck Royce's Royce & Associates, Lee Ainslie's Maverick Capital and Ken Griffin's Citadel Investment Group.

Because Monro Muffler Brake Inc (NASDAQ:MNRO) has experienced falling interest from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that elected to cut their positions entirely in the second quarter. Interestingly, Robert Pohly's Samlyn Capital said goodbye to the largest stake of all the hedgies watched by Insider Monkey, worth an estimated $5.5 million in stock, and Sander Gerber's Hudson Bay Capital Management was right behind this move, as the fund sold off about $1.7 million worth. These moves are interesting, as total hedge fund interest dropped by 3 funds in the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Monro Muffler Brake Inc (NASDAQ:MNRO) but similarly valued. These stocks are Altera Corporation (NASDAQ:ALTR), Hilton Grand Vacations Inc. (NYSE:HGV), Mimecast Limited (NASDAQ:MIME), and Hutchison China MediTech Limited (NASDAQ:HCM). This group of stocks' market caps are similar to MNRO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALTR,14,81367,-4 HGV,37,959432,0 MIME,26,846004,-9 HCM,23,103651,17 Average,25,497614,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $498 million. That figure was $237 million in MNRO's case. Hilton Grand Vacations Inc. (NYSE:HGV) is the most popular stock in this table. On the other hand Altera Corporation (NASDAQ:ALTR) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Monro Muffler Brake Inc (NASDAQ:MNRO) is even less popular than ALTR. Hedge funds dodged a bullet by taking a bearish stance towards MNRO. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately MNRO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MNRO investors were disappointed as the stock returned -7.1% during the third quarter 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 in 2019.

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

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