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Hedge Funds Dipping Their Toes Back Into ServiceMaster Global (SERV)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding ServiceMaster Global Holdings Inc (NYSE:SERV) and determine whether hedge funds had an edge regarding this stock.

Is ServiceMaster Global Holdings Inc (NYSE:SERV) worth your attention right now? The best stock pickers were getting more optimistic. The number of bullish hedge fund positions improved by 4 lately. ServiceMaster Global Holdings Inc (NYSE:SERV) was in 35 hedge funds’ portfolios at the end of June. The all time high for this statistics is 42. Our calculations also showed that SERV 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 31 hedge funds in our database with SERV positions at the end of the first quarter.

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.

Harold Levy Iridian Asset Management

Harold Levy of Iridian Asset Management

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. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Keeping this in mind we’re going to go over the latest hedge fund action regarding ServiceMaster Global Holdings Inc (NYSE:SERV).

How are hedge funds trading ServiceMaster Global Holdings Inc (NYSE:SERV)?

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SERV over the last 20 quarters. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

More specifically, Iridian Asset Management was the largest shareholder of ServiceMaster Global Holdings Inc (NYSE:SERV), with a stake worth $201.1 million reported as of the end of September. Trailing Iridian Asset Management was Gates Capital Management, which amassed a stake valued at $114.2 million. Southpoint Capital Advisors, Bloom Tree Partners, and Millennium Management 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 Bloom Tree Partners allocated the biggest weight to ServiceMaster Global Holdings Inc (NYSE:SERV), around 5.85% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, dishing out 5.71 percent of its 13F equity portfolio to SERV.

As one would reasonably expect, key money managers were leading the bulls’ herd. Bloom Tree Partners, managed by Alok Agrawal, established the most valuable position in ServiceMaster Global Holdings Inc (NYSE:SERV). Bloom Tree Partners had $48.7 million invested in the company at the end of the quarter. Doug Silverman and Alexander Klabin’s Senator Investment Group also initiated a $17.8 million position during the quarter. The following funds were also among the new SERV investors: David Brown’s Hawk Ridge Management, Phill Gross and Robert Atchinson’s Adage Capital Management, and Seth Wunder’s Black-and-White Capital.

Let’s now review hedge fund activity in other stocks similar to ServiceMaster Global Holdings Inc (NYSE:SERV). These stocks are Primerica, Inc. (NYSE:PRI), Targa Resources Corp (NYSE:TRGP), BlackLine, Inc. (NASDAQ:BL), Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), Cullen/Frost Bankers, Inc. (NYSE:CFR), Leggett & Platt, Inc. (NYSE:LEG), and Globus Medical Inc (NYSE:GMED). This group of stocks’ market caps are closest to SERV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PRI 25 385205 2
TRGP 31 289537 2
BL 18 227498 0
RARE 24 352560 6
CFR 13 21532 -5
LEG 29 184075 4
GMED 32 132005 13
Average 24.6 227487 3.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.6 hedge funds with bullish positions and the average amount invested in these stocks was $227 million. That figure was $726 million in SERV’s case. Globus Medical Inc (NYSE:GMED) is the most popular stock in this table. On the other hand Cullen/Frost Bankers, Inc. (NYSE:CFR) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks ServiceMaster Global Holdings Inc (NYSE:SERV) is more popular among hedge funds. Our overall hedge fund sentiment score for SERV is 84. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately SERV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SERV were disappointed as the stock returned 11.8% since the end of 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.