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Was The Smart Money Right About The RMR Group Inc. (RMR)?

Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. The following article will discuss the smart money sentiment towards The RMR Group Inc. (NASDAQ:RMR).

Is The RMR Group Inc. (NASDAQ:RMR) going to take off soon? Prominent investors are becoming less confident. The number of bullish hedge fund bets dropped by 1 recently. Our calculations also showed that RMR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). RMR was in 21 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 22 hedge funds in our database with RMR positions at the end of the previous quarter.

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 41 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.

Arnaud Ajdler Engine Capital

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the “next Amazon” in this video; again we are listening. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to go over the fresh hedge fund action surrounding The RMR Group Inc. (NASDAQ:RMR).

What have hedge funds been doing with The RMR Group Inc. (NASDAQ:RMR)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the third quarter of 2019. On the other hand, there were a total of 14 hedge funds with a bullish position in RMR a year ago. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

The largest stake in The RMR Group Inc. (NASDAQ:RMR) was held by Engine Capital, which reported holding $33.1 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $28.3 million position. Other investors bullish on the company included Zimmer Partners, Gobi Capital, and Hill Winds Capital. In terms of the portfolio weights assigned to each position Engine Capital allocated the biggest weight to The RMR Group Inc. (NASDAQ:RMR), around 12.89% of its 13F portfolio. Hill Winds Capital is also relatively very bullish on the stock, earmarking 4.59 percent of its 13F equity portfolio to RMR.

Since The RMR Group Inc. (NASDAQ:RMR) has witnessed falling interest from hedge fund managers, logic holds that there is a sect of hedge funds that decided to sell off their full holdings in the third quarter. At the top of the heap, Derek C. Schrier’s Indaba Capital Management dumped the biggest investment of all the hedgies followed by Insider Monkey, totaling close to $22.7 million in stock. Mark Coe’s fund, Intrinsic Edge Capital, also dropped its stock, about $0.8 million worth. These moves are interesting, as total hedge fund interest was cut by 1 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as The RMR Group Inc. (NASDAQ:RMR) but similarly valued. We will take a look at Stamps.com Inc. (NASDAQ:STMP), Innoviva, Inc. (NASDAQ:INVA), TPG Specialty Lending Inc (NYSE:TSLX), and First Commonwealth Financial (NYSE:FCF). This group of stocks’ market values match RMR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STMP 20 347431 3
INVA 19 303137 -6
TSLX 10 64908 0
FCF 15 33470 3
Average 16 187237 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $187 million. That figure was $122 million in RMR’s case. Stamps.com Inc. (NASDAQ:STMP) is the most popular stock in this table. On the other hand TPG Specialty Lending Inc (NYSE:TSLX) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks The RMR Group Inc. (NASDAQ:RMR) is more popular among hedge funds. 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 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately RMR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RMR were disappointed as the stock returned -34.4% during the four months of 2020 (through May 1st) 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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