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Were Hedge Funds Right About Republic Services, Inc. (RSG)?

Abigail Fisher

Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we've gathered as a result gives us access to a wealth of collective knowledge based on these firms' portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not Republic Services, Inc. (NYSE:RSG) makes for a good investment right now.

Is Republic Services, Inc. (NYSE:RSG) a marvelous investment today? The smart money is reducing their bets on the stock. The number of bullish hedge fund positions dropped by 9 lately. Our calculations also showed that RSG isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 41 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.

[caption id="attachment_30668" align="aligncenter" width="399"] Richard Chilton of Chilton Investment Company[/caption]

CHILTON INVESTMENT COMPANY

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader's corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to analyze the fresh hedge fund action surrounding Republic Services, Inc. (NYSE:RSG).

What does smart money think about Republic Services, Inc. (NYSE:RSG)?

At the end of the fourth quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -26% from one quarter earlier. On the other hand, there were a total of 30 hedge funds with a bullish position in RSG a year ago. So, let's check 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 $194.6 million worth of stock at the end of September. It was followed by GAMCO Investors with a $130.9 million position. Other investors bullish on the company included Chilton Investment Company, Two Sigma Advisors, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Appian Way Asset Management allocated the biggest weight to Republic Services, Inc. (NYSE:RSG), around 5.63% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, earmarking 3.06 percent of its 13F equity portfolio to RSG.

Judging by the fact that Republic Services, Inc. (NYSE:RSG) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few fund managers that decided to sell off their full holdings in the third quarter. Intriguingly, Israel Englander's Millennium Management cut the largest investment of all the hedgies watched by Insider Monkey, valued at close to $16.4 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also sold off its stock, about $7.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 9 funds in the third quarter.

Let's now take a look at 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 TAL Education Group (NYSE:TAL), T. Rowe Price Group, Inc. (NASDAQ:TROW), Mercadolibre Inc (NASDAQ:MELI), and Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK). All of these stocks' market caps resemble RSG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TAL,30,1805173,9 TROW,27,215816,3 MELI,52,2809834,4 TLK,8,210873,0 Average,29.25,1260424,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $1260 million. That figure was $684 million in RSG's case. Mercadolibre Inc (NASDAQ:MELI) is the most popular stock in this table. On the other hand Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK) is the least popular one with only 8 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. 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 1.0% in 2020 through May 1st but beat the market by 12.9 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 -13.5% during the same time period 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. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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