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Were Hedge Funds Right About Martin Marietta Materials, Inc. (MLM) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtMartin Marietta Materials, Inc. (NYSE:MLM) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Martin Marietta Materials, Inc. (NYSE:MLM) was in 44 hedge funds’ portfolios at the end of the first quarter of 2020. MLM has experienced a decrease in activity from the world’s largest hedge funds of late. There were 52 hedge funds in our database with MLM holdings at the end of the previous quarter. Our calculations also showed that MLM isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 58 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.

Phill Gross of Adage Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a look at the key hedge fund action encompassing Martin Marietta Materials, Inc. (NYSE:MLM).

What does smart money think about Martin Marietta Materials, Inc. (NYSE:MLM)?

Heading into the second quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from one quarter earlier. On the other hand, there were a total of 36 hedge funds with a bullish position in MLM a year ago. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

Among these funds, Select Equity Group held the most valuable stake in Martin Marietta Materials, Inc. (NYSE:MLM), which was worth $615.7 million at the end of the third quarter. On the second spot was Gardner Russo & Gardner which amassed $312.2 million worth of shares. Alkeon Capital Management, Adage Capital Management, and Nitorum Capital 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 East Side Capital (RR Partners) allocated the biggest weight to Martin Marietta Materials, Inc. (NYSE:MLM), around 8.63% of its 13F portfolio. Lafitte Capital Management is also relatively very bullish on the stock, designating 6.5 percent of its 13F equity portfolio to MLM.

Judging by the fact that Martin Marietta Materials, Inc. (NYSE:MLM) has experienced bearish sentiment from the smart money, it’s easy to see that there lies a certain “tier” of funds who were dropping their entire stakes by the end of the first quarter. It’s worth mentioning that John Armitage’s Egerton Capital Limited said goodbye to the largest stake of the 750 funds watched by Insider Monkey, valued at close to $347 million in stock. Daniel Lascano’s fund, Lomas Capital Management, also said goodbye to its stock, about $78.6 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 8 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Martin Marietta Materials, Inc. (NYSE:MLM) but similarly valued. These stocks are Mid America Apartment Communities Inc (NYSE:MAA), Xylem Inc (NYSE:XYL), Tyler Technologies, Inc. (NYSE:TYL), and Sun Communities Inc (NYSE:SUI). This group of stocks’ market valuations are similar to MLM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MAA 26 244541 2
XYL 27 428104 6
TYL 30 405643 9
SUI 28 323201 -3
Average 27.75 350372 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $350 million. That figure was $1437 million in MLM’s case. Tyler Technologies, Inc. (NYSE:TYL) is the most popular stock in this table. On the other hand Mid America Apartment Communities Inc (NYSE:MAA) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Martin Marietta Materials, Inc. (NYSE:MLM) 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately MLM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on MLM were disappointed as the stock returned 9.5% during 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.