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MAXIMUS, Inc. (MMS): Hedge Funds In Wait-and-See Mode

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 MAXIMUS, Inc. (NYSE:MMS) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in MAXIMUS, Inc. (NYSE:MMS) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that MMS 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). At the end of this article we will also compare MMS to other stocks including Nomad Foods Limited (NYSE:NOMD), Landstar System, Inc. (NASDAQ:LSTR), and II-VI, Inc. (NASDAQ:IIVI) to get a better sense of its popularity.

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.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 take a look at the fresh hedge fund action regarding MAXIMUS, Inc. (NYSE:MMS).

What does smart money think about MAXIMUS, Inc. (NYSE:MMS)?

At the end of June, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in MMS over the last 20 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, P2 Capital Partners was the largest shareholder of MAXIMUS, Inc. (NYSE:MMS), with a stake worth $48.7 million reported as of the end of September. Trailing P2 Capital Partners was AQR Capital Management, which amassed a stake valued at $33.1 million. GLG Partners, Renaissance Technologies, and Citadel Investment Group 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 P2 Capital Partners allocated the biggest weight to MAXIMUS, Inc. (NYSE:MMS), around 4.07% of its 13F portfolio. Running Oak Capital is also relatively very bullish on the stock, earmarking 1.82 percent of its 13F equity portfolio to MMS.

Because MAXIMUS, Inc. (NYSE:MMS) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few hedge funds who sold off their full holdings heading into Q3. It’s worth mentioning that Benjamin A. Smith’s Laurion Capital Management said goodbye to the biggest position of all the hedgies followed by Insider Monkey, comprising close to $1.3 million in stock. Greg Eisner’s fund, Engineers Gate Manager, also cut its stock, about $1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to MAXIMUS, Inc. (NYSE:MMS). These stocks are Nomad Foods Limited (NYSE:NOMD), Landstar System, Inc. (NASDAQ:LSTR), II-VI, Inc. (NASDAQ:IIVI), CAE, Inc. (NYSE:CAE), Noble Energy, Inc. (NASDAQ:NBL), Switch, Inc. (NYSE:SWCH), and Grand Canyon Education Inc (NASDAQ:LOPE). This group of stocks’ market valuations are closest to MMS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NOMD 34 437867 0
LSTR 23 207278 1
IIVI 28 176363 8
CAE 14 106251 -6
NBL 38 364034 3
SWCH 22 410263 -2
LOPE 35 206855 7
Average 27.7 272702 1.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.7 hedge funds with bullish positions and the average amount invested in these stocks was $273 million. That figure was $158 million in MMS’s case. Noble Energy, Inc. (NASDAQ:NBL) is the most popular stock in this table. On the other hand CAE, Inc. (NYSE:CAE) is the least popular one with only 14 bullish hedge fund positions. MAXIMUS, Inc. (NYSE:MMS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MMS is 60. 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 negative signal and 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately MMS wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MMS investors were disappointed as the stock returned -3.6% since Q2 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.