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Hedge Funds Are Getting More Bullish On MSC Industrial Direct Co Inc (MSM)

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought MSC Industrial Direct Co Inc (NYSE:MSM) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

MSC Industrial Direct Co Inc (NYSE:MSM) was in 30 hedge funds’ portfolios at the end of June. The all time high for this statistics is 30. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. MSM shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. There were 23 hedge funds in our database with MSM positions at the end of the first quarter. Our calculations also showed that MSM 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).

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 56 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.

Donald Yacktman of Yacktman Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to take a gander at the key hedge fund action regarding MSC Industrial Direct Co Inc (NYSE:MSM).

Hedge fund activity in MSC Industrial Direct Co Inc (NYSE:MSM)

Heading into the third quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards MSM over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Yacktman Asset Management, managed by Donald Yacktman, holds the biggest position in MSC Industrial Direct Co Inc (NYSE:MSM). Yacktman Asset Management has a $90.2 million position in the stock, comprising 1.4% of its 13F portfolio. Coming in second is Citadel Investment Group, led by Ken Griffin, holding a $74.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other peers that hold long positions include David Paradice’s Paradice Investment Management, Chuck Royce’s Royce & Associates and Richard S. Pzena’s Pzena Investment Management. In terms of the portfolio weights assigned to each position Paradice Investment Management allocated the biggest weight to MSC Industrial Direct Co Inc (NYSE:MSM), around 5.06% of its 13F portfolio. Value Holdings LP is also relatively very bullish on the stock, dishing out 2.57 percent of its 13F equity portfolio to MSM.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Millennium Management, managed by Israel Englander, assembled the most outsized position in MSC Industrial Direct Co Inc (NYSE:MSM). Millennium Management had $20.7 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $11.1 million position during the quarter. The following funds were also among the new MSM investors: Alexander Mitchell’s Scopus Asset Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Donald Sussman’s Paloma Partners.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as MSC Industrial Direct Co Inc (NYSE:MSM) but similarly valued. These stocks are Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (NYSE:PAC), Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), TFS Financial Corporation (NASDAQ:TFSL), AerCap Holdings N.V. (NYSE:AER), Manpowergroup Inc (NYSE:MAN), Integra Lifesciences Holdings Corp (NASDAQ:IART), and Darling Ingredients Inc. (NYSE:DAR). This group of stocks’ market valuations are closest to MSM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PAC 7 103052 2
IOVA 43 1341814 4
TFSL 11 122677 2
AER 30 934619 -2
MAN 34 377077 11
IART 23 101326 1
DAR 25 403765 0
Average 24.7 483476 2.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.7 hedge funds with bullish positions and the average amount invested in these stocks was $483 million. That figure was $389 million in MSM’s case. Iovance Biotherapeutics, Inc. (NASDAQ:IOVA) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (NYSE:PAC) is the least popular one with only 7 bullish hedge fund positions. MSC Industrial Direct Co Inc (NYSE:MSM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MSM is 71.9. 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. 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 23.8% in 2020 through September 14th and beat the market by 17.6 percentage points. Unfortunately MSM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MSM were disappointed as the stock returned -9.5% 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.