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Did Hedge Funds Make The Right Call On Cantel Medical Corp. (CMD) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Cantel Medical Corp. (NYSE:CMD) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Cantel Medical Corp. (NYSE:CMD) was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. CMD has experienced an increase in activity from the world’s largest hedge funds of late. There were 11 hedge funds in our database with CMD holdings at the end of the previous quarter. Our calculations also showed that CMD isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 58 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to view the fresh hedge fund action regarding Cantel Medical Corp. (NYSE:CMD).

What have hedge funds been doing with Cantel Medical Corp. (NYSE:CMD)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 55% from the previous quarter. On the other hand, there were a total of 18 hedge funds with a bullish position in CMD a year ago. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Is CMD A Good Stock To Buy?

More specifically, Diker Management was the largest shareholder of Cantel Medical Corp. (NYSE:CMD), with a stake worth $41.8 million reported as of the end of September. Trailing Diker Management was Millennium Management, which amassed a stake valued at $24.8 million. Citadel Investment Group, Laurion Capital Management, and GAMCO Investors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Diker Management allocated the biggest weight to Cantel Medical Corp. (NYSE:CMD), around 17.65% of its 13F portfolio. Ellington is also relatively very bullish on the stock, designating 0.09 percent of its 13F equity portfolio to CMD.

As aggregate interest increased, some big names have jumped into Cantel Medical Corp. (NYSE:CMD) headfirst. Laurion Capital Management, managed by Benjamin A. Smith, created the most valuable position in Cantel Medical Corp. (NYSE:CMD). Laurion Capital Management had $1.5 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $1.3 million position during the quarter. The following funds were also among the new CMD investors: Cliff Asness’s AQR Capital Management, Greg Eisner’s Engineers Gate Manager, and D. E. Shaw’s D E Shaw.

Let’s go over hedge fund activity in other stocks similar to Cantel Medical Corp. (NYSE:CMD). These stocks are Guangshen Railway Co. Ltd (NYSE:GSH), Horace Mann Educators Corporation (NYSE:HMN), Tenet Healthcare Corp (NYSE:THC), and American Assets Trust, Inc (NYSE:AAT). This group of stocks’ market values are similar to CMD’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GSH 2 3453 1
HMN 11 22120 0
THC 35 490303 1
AAT 15 33326 0
Average 15.75 137301 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $137 million. That figure was $89 million in CMD’s case. Tenet Healthcare Corp (NYSE:THC) is the most popular stock in this table. On the other hand Guangshen Railway Co. Ltd (NYSE:GSH) is the least popular one with only 2 bullish hedge fund positions. Cantel Medical Corp. (NYSE:CMD) is not the most popular stock in this group but hedge fund interest is still above average. 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on CMD as the stock returned 40.7% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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