Do Hedge Funds Love McGrath RentCorp (MGRC)?

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 second 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 5 years and analyze what the smart money thinks of McGrath RentCorp (NASDAQ:MGRC) based on that data and determine whether they were really smart about the stock.

Is McGrath RentCorp (NASDAQ:MGRC) the right pick for your portfolio? The smart money was getting more optimistic. The number of bullish hedge fund bets inched up by 2 recently. McGrath RentCorp (NASDAQ:MGRC) was in 22 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 23. Our calculations also showed that MGRC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 20 hedge funds in our database with MGRC holdings at the end of March.

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

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to check out the recent hedge fund action surrounding McGrath RentCorp (NASDAQ:MGRC).

How have hedgies been trading McGrath RentCorp (NASDAQ:MGRC)?

At the end of June, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the first quarter of 2020. By comparison, 18 hedge funds held shares or bullish call options in MGRC a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Among these funds, Royce & Associates held the most valuable stake in McGrath RentCorp (NASDAQ:MGRC), which was worth $12.4 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $12 million worth of shares. Headlands Capital, Arrowstreet Capital, and Two Sigma Advisors 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 Headlands Capital allocated the biggest weight to McGrath RentCorp (NASDAQ:MGRC), around 11.84% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, setting aside 0.69 percent of its 13F equity portfolio to MGRC.

As one would reasonably expect, specific money managers have been driving this bullishness. Tudor Investment Corp, managed by Paul Tudor Jones, assembled the largest position in McGrath RentCorp (NASDAQ:MGRC). Tudor Investment Corp had $0.9 million invested in the company at the end of the quarter. Charles Paquelet’s Skylands Capital also made a $0.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Michael Gelband’s ExodusPoint Capital, and Peter Muller’s PDT Partners.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as McGrath RentCorp (NASDAQ:MGRC) but similarly valued. We will take a look at Northwest Bancshares, Inc. (NASDAQ:NWBI), HNI Corp (NYSE:HNI), Veracyte Inc (NASDAQ:VCYT), Atkore International Group Inc. (NYSE:ATKR), Allegheny Technologies Incorporated (NYSE:ATI), Dycom Industries, Inc. (NYSE:DY), and Repay Holdings Corporation (NASDAQ:RPAY). This group of stocks’ market caps resemble MGRC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.6 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $78 million in MGRC’s case. Allegheny Technologies Incorporated (NYSE:ATI) is the most popular stock in this table. On the other hand Northwest Bancshares, Inc. (NASDAQ:NWBI) is the least popular one with only 8 bullish hedge fund positions. McGrath RentCorp (NASDAQ:MGRC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MGRC is 72.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 24.8% in 2020 through the end of third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on MGRC as the stock returned 11.2% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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