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Hedge Funds Are Selling MSC Industrial Direct Co Inc (MSM)

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 15.1% over the last 12 months (vs. 5.6% gain for SPY), with 53% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in MSC Industrial Direct Co Inc (NYSE:MSM).

MSC Industrial Direct Co Inc (NYSE:MSM) was in 19 hedge funds’ portfolios at the end of the third quarter of 2018. MSM has seen a decrease in enthusiasm from smart money of late. There were 22 hedge funds in our database with MSM holdings at the end of the previous quarter. Our calculations also showed that msm isn’t among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

Let’s take a peek 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 fourth quarter of 2018, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MSM over the last 13 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

No of Hedge Funds with MSM Positions

More specifically, D E Shaw was the largest shareholder of MSC Industrial Direct Co Inc (NYSE:MSM), with a stake worth $32 million reported as of the end of September. Trailing D E Shaw was Renaissance Technologies, which amassed a stake valued at $18.9 million. AQR Capital Management, Marshall Wace LLP, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that MSC Industrial Direct Co Inc (NYSE:MSM) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of money managers that decided to sell off their full holdings heading into Q3. It’s worth mentioning that Allan Mecham and Ben Raybould’s Arlington Value Capital cut the biggest stake of the 700 funds watched by Insider Monkey, comprising an estimated $18.8 million in stock, and Clint Carlson’s Carlson Capital was right behind this move, as the fund sold off about $4.2 million worth. These moves are important to note, as total hedge fund interest dropped by 3 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to MSC Industrial Direct Co Inc (NYSE:MSM). These stocks are Nuance Communications Inc. (NASDAQ:NUAN), Quanta Services Inc (NYSE:PWR), SINA Corp (NASDAQ:SINA), and Enbridge Energy Partners, L.P. (NYSE:EEP). This group of stocks’ market caps resemble MSM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NUAN 20 398090 0
PWR 34 508552 0
SINA 24 769904 -4
EEP 3 7459 0
Average 20.25 421001 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $421 million. That figure was $115 million in MSM’s case. Quanta Services Inc (NYSE:PWR) is the most popular stock in this table. On the other hand Enbridge Energy Partners, L.P. (NYSE:EEP) is the least popular one with only 3 bullish hedge fund positions. MSC Industrial Direct Co Inc (NYSE:MSM) 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. In this regard PWR might be a better candidate to consider a long position.

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

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