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Did Hedge Funds Make The Right Call On Healthcare Services Group, Inc. (HCSG)?

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 Healthcare Services Group, Inc. (NASDAQ:HCSG) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Healthcare Services Group, Inc. (NASDAQ:HCSG) a buy here? The best stock pickers were in an optimistic mood. The number of bullish hedge fund positions inched up by 2 lately. Our calculations also showed that HCSG 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). HCSG was in 20 hedge funds’ portfolios at the end of March. There were 18 hedge funds in our database with HCSG holdings at the end of the previous quarter.

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.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 take a look at the recent hedge fund action regarding Healthcare Services Group, Inc. (NASDAQ:HCSG).

Hedge fund activity in Healthcare Services Group, Inc. (NASDAQ:HCSG)

Heading into the second quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in HCSG a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Tom Gayner’s Markel Gayner Asset Management has the largest position in Healthcare Services Group, Inc. (NASDAQ:HCSG), worth close to $16.7 million, corresponding to 0.3% of its total 13F portfolio. Sitting at the No. 2 spot is John Overdeck and David Siegel of Two Sigma Advisors, with a $13.6 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism consist of D. E. Shaw’s D E Shaw, Francois Rochon’s Giverny Capital and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Rutabaga Capital Management allocated the biggest weight to Healthcare Services Group, Inc. (NASDAQ:HCSG), around 3.66% of its 13F portfolio. Giverny Capital is also relatively very bullish on the stock, designating 0.9 percent of its 13F equity portfolio to HCSG.

As aggregate interest increased, key hedge funds were breaking ground themselves. Rutabaga Capital Management, managed by Peter Schliemann, established the largest position in Healthcare Services Group, Inc. (NASDAQ:HCSG). Rutabaga Capital Management had $6.1 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $3.1 million position during the quarter. The other funds with new positions in the stock are Mark Coe’s Intrinsic Edge Capital, Steve Cohen’s Point72 Asset Management, and Benjamin A. Smith’s Laurion Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Healthcare Services Group, Inc. (NASDAQ:HCSG) but similarly valued. These stocks are Ballard Power Systems Inc. (NASDAQ:BLDP), KB Home (NYSE:KBH), Applied Industrial Technologies Inc (NYSE:AIT), and National Storage Affiliates Trust (NYSE:NSA). This group of stocks’ market values resemble HCSG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BLDP 10 21232 4
KBH 25 291267 -4
AIT 14 35993 -8
NSA 18 77143 7
Average 16.75 106409 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $106 million. That figure was $87 million in HCSG’s case. KB Home (NYSE:KBH) is the most popular stock in this table. On the other hand Ballard Power Systems Inc. (NASDAQ:BLDP) is the least popular one with only 10 bullish hedge fund positions. Healthcare Services Group, Inc. (NASDAQ:HCSG) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately HCSG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HCSG were disappointed as the stock returned 12.9% 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 many of these stocks already outperformed the market so far this year.

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