Is MGRC A Good Stock To Buy Now?

A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended September 30, so let’s proceed with the discussion of the hedge fund sentiment on McGrath RentCorp (NASDAQ:MGRC).

Is MGRC a good stock to buy now? McGrath RentCorp (NASDAQ:MGRC) was in 19 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 23. MGRC has experienced a decrease in enthusiasm from smart money recently. There were 22 hedge funds in our database with MGRC positions at the end of the second quarter. Our calculations also showed that MGRC isn’t among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.

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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. With all of this in mind we’re going to review the recent hedge fund action surrounding McGrath RentCorp (NASDAQ:MGRC).

Do Hedge Funds Think MGRC Is A Good Stock To Buy Now?

At third quarter’s end, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MGRC over the last 21 quarters. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Royce & Associates held the most valuable stake in McGrath RentCorp (NASDAQ:MGRC), which was worth $13.7 million at the end of the third quarter. On the second spot was Headlands Capital which amassed $12.7 million worth of shares. Arrowstreet Capital, Two Sigma Advisors, and Renaissance Technologies 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 13.39% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, earmarking 1.1 percent of its 13F equity portfolio to MGRC.

Due to the fact that McGrath RentCorp (NASDAQ:MGRC) has faced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of funds that slashed their entire stakes in the third quarter. Intriguingly, Ken Grossman and Glen Schneider’s SG Capital Management said goodbye to the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth close to $1 million in stock, and Paul Tudor Jones’s Tudor Investment Corp was right behind this move, as the fund dumped about $0.9 million worth. These moves are interesting, as total hedge fund interest dropped by 3 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to McGrath RentCorp (NASDAQ:MGRC). These stocks are Niu Technologies (NASDAQ:NIU), Sinclair Broadcast Group, Inc. (NASDAQ:SBGI), RLJ Lodging Trust (NYSE:RLJ), Azure Power Global Limited (NYSE:AZRE), Industrial Logistics Properties Trust (NASDAQ:ILPT), The Michaels Companies Inc (NASDAQ:MIK), and Southwestern Energy Company (NYSE:SWN). This group of stocks’ market valuations match MGRC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $75 million in MGRC’s case. The Michaels Companies Inc (NASDAQ:MIK) is the most popular stock in this table. On the other hand Azure Power Global Limited (NYSE:AZRE) is the least popular one with only 4 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 48.8. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately MGRC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MGRC were disappointed as the stock returned 6.3% since the end of September (through 12/14) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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