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Did Hedge Funds Make The Right Call On Republic Services, Inc. (RSG)?

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 Republic Services, Inc. (NYSE:RSG) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Republic Services, Inc. (NYSE:RSG) undervalued? The best stock pickers were becoming more confident. The number of bullish hedge fund bets inched up by 6 lately. Our calculations also showed that RSG 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

CHILTON INVESTMENT COMPANY

Richard Chilton of Chilton Investment Company

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a look at the recent hedge fund action encompassing Republic Services, Inc. (NYSE:RSG).

What have hedge funds been doing with Republic Services, Inc. (NYSE:RSG)?

At Q1’s end, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 23% from one quarter earlier. By comparison, 30 hedge funds held shares or bullish call options in RSG a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, AQR Capital Management held the most valuable stake in Republic Services, Inc. (NYSE:RSG), which was worth $161.2 million at the end of the third quarter. On the second spot was GAMCO Investors which amassed $103.5 million worth of shares. Renaissance Technologies, Citadel Investment Group, and Chilton Investment Company 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 Chilton Investment Company allocated the biggest weight to Republic Services, Inc. (NYSE:RSG), around 3.17% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, earmarking 1.91 percent of its 13F equity portfolio to RSG.

With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls’ herd. Millennium Management, managed by Israel Englander, created the most outsized position in Republic Services, Inc. (NYSE:RSG). Millennium Management had $16.6 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $3.7 million investment in the stock during the quarter. The other funds with brand new RSG positions are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Phill Gross and Robert Atchinson’s Adage Capital Management.

Let’s go over hedge fund activity in other stocks similar to Republic Services, Inc. (NYSE:RSG). We will take a look at IHS Markit Ltd. (NYSE:INFO), eBay Inc (NASDAQ:EBAY), Telefonica S.A. (NYSE:TEF), and The Kroger Co. (NYSE:KR). All of these stocks’ market caps are similar to RSG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INFO 44 1159316 15
EBAY 52 3096036 1
TEF 7 16531 -2
KR 43 1581591 12
Average 36.5 1463369 6.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $1463 million. That figure was $709 million in RSG’s case. eBay Inc (NASDAQ:EBAY) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 7 bullish hedge fund positions. Republic Services, Inc. (NYSE:RSG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately RSG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RSG investors were disappointed as the stock returned 9.9% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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