Did Hedge Funds Make The Right Call On Meritor Inc (MTOR) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Meritor Inc (NYSE:MTOR) based on that data and determine whether they were really smart about the stock.

Meritor Inc (NYSE:MTOR) investors should be aware of a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that MTOR 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.

Thomas Sandell

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. With all of this in mind let’s take a look at the latest hedge fund action regarding Meritor Inc (NYSE:MTOR).

What have hedge funds been doing with Meritor Inc (NYSE:MTOR)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -41% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in MTOR over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MTOR A Good Stock To Buy?

The largest stake in Meritor Inc (NYSE:MTOR) was held by Glenview Capital, which reported holding $95.5 million worth of stock at the end of September. It was followed by Royce & Associates with a $16.2 million position. Other investors bullish on the company included Arrowstreet Capital, GMT Capital, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Anchor Bolt Capital allocated the biggest weight to Meritor Inc (NYSE:MTOR), around 4.47% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, earmarking 3.38 percent of its 13F equity portfolio to MTOR.

Seeing as Meritor Inc (NYSE:MTOR) has faced bearish sentiment from the smart money, we can see that there exists a select few hedgies who were dropping their positions entirely last quarter. Interestingly, Richard Driehaus’s Driehaus Capital sold off the biggest stake of the 750 funds followed by Insider Monkey, totaling about $14.5 million in stock. Renaissance Technologies, also dropped its stock, about $12.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 12 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Meritor Inc (NYSE:MTOR). We will take a look at CSW Industrials, Inc. (NASDAQ:CSWI), Kronos Worldwide, Inc. (NYSE:KRO), Mesa Laboratories, Inc. (NASDAQ:MLAB), and BP Midstream Partners LP (NYSE:BPMP). All of these stocks’ market caps are closest to MTOR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CSWI 16 32007 0
KRO 13 35959 0
MLAB 7 72515 -3
BPMP 5 6669 -1
Average 10.25 36788 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $37 million. That figure was $166 million in MTOR’s case. CSW Industrials, Inc. (NASDAQ:CSWI) is the most popular stock in this table. On the other hand BP Midstream Partners LP (NYSE:BPMP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Meritor Inc (NYSE:MTOR) is more popular among hedge funds. 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on MTOR as the stock returned 83.2% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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