Is Healthcare Services Group, Inc. (HCSG) A Good Stock To Buy?

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.

Is Healthcare Services Group, Inc. (NASDAQ:HCSG) an exceptional investment today? The smart money is actually becoming more confident. The number of long hedge fund bets improved by 3 recently. HCSG was in 8 hedge funds’ portfolios at the end of September. There were 5 hedge funds in our database with HCSG holdings at the end of the previous quarter. At the end of this article we will also compare HCSG to other stocks including Landstar System, Inc. (NASDAQ:LSTR), Swift Transportation Co (NYSE:SWFT), and Mentor Graphics Corp (NASDAQ:MENT) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

What does the smart money think about Healthcare Services Group, Inc. (NASDAQ:HCSG)?

Heading into the fourth quarter of 2016, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, up by 60% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HCSG over the last 5 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.

According to Insider Monkey’s hedge fund database, Royce & Associates, led by Chuck Royce, holds the largest position in Healthcare Services Group, Inc. (NASDAQ:HCSG). Royce & Associates has a $12.9 million position in the stock. Coming in second is Marshall Wace LLP, led by Paul Marshall and Ian Wace, which holds a $5.4 million position. Some other professional money managers that are bullish comprise Brian Ashford-Russell and Tim Woolley’s Polar Capital, and Cliff Asness’ AQR Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As industrywide interest jumped, key hedge funds have jumped into Healthcare Services Group, Inc. (NASDAQ:HCSG) headfirst. Marshall Wace LLP, led by Paul Marshall and Ian Wace, established the most valuable position in Healthcare Services Group, Inc. (NASDAQ:HCSG). Ken Griffin’s Citadel Investment Group also made a $1.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Tudor Jones’ Tudor Investment Corp, Matthew Hulsizer’s PEAK6 Capital Management, and Mike Vranos’ Ellington.

Let’s also examine hedge fund activity in other stocks similar to Healthcare Services Group, Inc. (NASDAQ:HCSG). These stocks are Landstar System, Inc. (NASDAQ:LSTR), Swift Transportation Co (NYSE:SWFT), Mentor Graphics Corp (NASDAQ:MENT), and Extended Stay America Inc (NYSE:STAY). This group of stocks’ market values are closest to HCSG’s market value.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $595 million. That figure was $23 million in HCSG’s case. Mentor Graphics Corp (NASDAQ:MENT) is the most popular stock in this table. On the other hand Landstar System, Inc. (NASDAQ:LSTR) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Healthcare Services Group, Inc. (NASDAQ:HCSG) is even less popular than LSTR. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None