Hedge Funds’ Favorite Advertising Stocks

The advertising industry is going through a paradigm shift.  Erstwhile  prominent platforms like print and television are losing their appeal and new platforms such as mobile and virtual reality are taking their space. While the disruption in the advertising industry is nothing new, having started in the mid-90’s when the Internet reached the masses, the pace of that disruption has definitely gone up in the last few years. This rapid change in the landscape has forced most advertising giants to rework their strategies and come up with solutions that are apt for the current era. Those advertising companies that have managed to do this have been able to survive, if not thrive, whereas those companies that couldn’t change with the times have gone out of business.

Due to this uncertainty in the sector where one is never sure which company is going to survive the next disruption, it often becomes hard for an investor to choose the right stocks from the advertising space for their portfolios. In order to make that task easier for readers, we at Insider Monkey routinely come up with a list of advertising stocks that are hot among the hedge funds tracked by us. In this post, we will take a look at the five advertising stocks that were most popular going into the third quarter among hedge funds we cover, and will analyze their respective year-to-date performances.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

#5 RetailMeNot Inc (NASDAQ:SALE)

– Hedge Funds with Long Positions (as of June 30): 17

– Value of Hedge Funds’ Holdings (as of June 30): $44.67 Million

Let’s start with RetailMeNot Inc (NASDAQ:SALE), which was the fifth most popular advertising stock at the end of June among hedge funds tracked by us. During the second quarter, the number of hedge funds that had long positions in the stock inched up by two, with the aggregate value of their holdings increasing by $2.91 million. RetailMeNot Inc (NASDAQ:SALE)’s stock is currently trading up 13.65% year-to-date amid a 50% rally it has seen since the company announced its second-quarter numbers at the beginning of the last month. Most analysts who cover the stock think that it can see a further upside in the coming months as apart from the desktop traffic, most other business drivers of the company are growing at a rapid pace and it has enough cash on its hand currently to invest through a weak market environment. However, there are a few analysts who don’t agree with that view like those at Morgan Stanley, who on September 12, downgraded the stock to ‘Underweight’ from ‘Equal Weight’ and also reduced their price target to $8.60 from $11.49.

 #4 MDC Partners Inc (NASDAQ:MDCA)

– Hedge Funds with Long Positions (as of June 30): 18

– Value of Hedge Funds’ Holdings (as of June 30): $249 Million

MDC Partners Inc (NASDAQ:MDCA) saw a minor drop in its popularity during the second quarter among hedge funds covered by us with its ownership among them declining by one and the aggregate value of their holdings declined by $54.4 million. The New York-based advertising and Communications company has lost more than 44% of its market capitalization so far this year with most of those losses coming after it reported its last two quarterly reports on May 3 and July 28, respectively. Despite the beating that its stock has taken, the company hasn’t slashed its quarterly dividend of $0.21 per share and this has helped the stock’s annual dividend yield to rise to almost 7%. Earlier this month, analysts at Albert Fried & Company released a note in which they wrote that shares of MDC Partners Inc (NASDAQ:MDCA) are “speculative deep value,” and highlighted that apart from base valuation the management of the company should explore M&A opportunities from key international ad companies.

#3 Groupon Inc (NASDAQ:GRPN)

– Hedge Funds with Long Positions (as of June 30): 23

– Value of Hedge Funds’ Holdings (as of June 30): $125.98 Million

Though the ownership of Groupon Inc (NASDAQ:GRPN) among hedge funds tracked by us rose by five during the second quarter, the aggregate value of their holdings in the company fell by $77.89 million during that time .Funds that initiated a stake in the company during the second quarter included Peter Adam Hochfelder‘s Brahman Capital and Joseph Mathias‘ Concourse Capital Management. When most market participants had given up on Groupon Inc (NASDAQ:GRPN)’s stock following its disastrous performance since its IPO, it did a U-turn earlier this year and currently trades up by 63% year-to-date. However, this rally that the stock has seen since the company came out with its second quarter numbers hasn’t impressed most analysts who argue that the revenue growth that Groupon is witnessing currently isn’t sustainable and will reverse once it cuts is marketing spend.

#2 Omnicom Group Inc. (NYSE:OMC)

– Hedge Funds with Long Positions (as of June 30): 24

– Value of Hedge Funds’ Holdings (as of June 30): $1.77 Billion

The number of hedge funds covered by us that were long Omnicom Group Inc. (NYSE:OMC) declined by one during the second quarter, however, the aggregate value of their holdings in the company during that period jumped by $62 million. In March this year, Omnicom Group Inc. (NYSE:OMC)’s stock broke above the $65-$80 trading range that it was confined to for more than two years and recently reached its lifetime high at $87.50. The Madison Avenue-headquartered advertising giant has been on a winning streak of late, first it won the massive AT&T account on August 12 and within a few weeks of it landed an exclusive contract with McDonald’s Corporation, wherein it will be the fast food giant’s new partner for all of its U.S. national marketing initiatives. Currently, Omnicom Group Inc. (NYSE:OMC)’s stock sports an average ‘Hold’ rating and an average price target of $82.21 from the 16 leading analysts on Wall Street who cover it.

#1 Interpublic Group of Companies Inc (NYSE:IPG)

– Hedge Funds with Long Positions (as of June 30): 35

– Value of Hedge Funds’ Holdings (as of June 30): $1.43 Billion

Despite its ownership among hedge funds covered by us declining by two during the second quarter and the aggregate value of their holdings in it shrinking by $341 million, Interpublic Group of Companies Inc (NYSE:IPG) continued to remain the favorite advertising stock of hedge funds tracked by insider Monkey at the end of June. Apart from MDC Partners Inc, Interpublic Group of Companies Inc (NYSE:IPG) is also the only stock in this list that is trading in the red for 2016 currently, down by 5.18%. The company currently pays a quarterly dividend of $0.15 per share, which translates into an annual dividend yield of 2.7%. Interpublic Group of Companies is expected to report its third-quarter results next month and the current consensus estimate among analysts is for EPS of $0.29 on revenue of $1.9 billion. For the same quarter of the previous year, the company had reported EPS of $0.18 on revenue of $1.87 billion. Billionaire Mario Gabelli‘s GAMCO Investors was one of the investors that reduced its stake in Interpublic Group of Companies Inc (NYSE:IPG) during the second quarter, by 4% to 4.5 million shares.

Disclosure: None