Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Mercury General Corporation (NYSE:MCY).
Is Mercury General Corporation (NYSE:MCY) a cheap stock to buy now? The smart money was becoming hopeful. The number of bullish hedge fund positions increased by 2 recently. Mercury General Corporation (NYSE:MCY) was in 20 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 22. Our calculations also showed that MCY isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).
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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let’s check out the key hedge fund action regarding Mercury General Corporation (NYSE:MCY).
Do Hedge Funds Think MCY Is A Good Stock To Buy Now?
Heading into the second quarter of 2021, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MCY over the last 23 quarters. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, holds the number one position in Mercury General Corporation (NYSE:MCY). Renaissance Technologies has a $103.1 million position in the stock, comprising 0.1% of its 13F portfolio. The second largest stake is held by Cliff Asness of AQR Capital Management, with a $14.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining members of the smart money that are bullish include Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Scott Wallace’s Wallace Capital Management and Scott Wallace’s Wallace Capital Management. In terms of the portfolio weights assigned to each position Wallace Capital Management allocated the biggest weight to Mercury General Corporation (NYSE:MCY), around 1.53% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, dishing out 1.53 percent of its 13F equity portfolio to MCY.
With a general bullishness amongst the heavyweights, key money managers have jumped into Mercury General Corporation (NYSE:MCY) headfirst. PEAK6 Capital Management, managed by Matthew Hulsizer, initiated the most outsized call position in Mercury General Corporation (NYSE:MCY). PEAK6 Capital Management had $1.6 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also initiated a $1.2 million position during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, and Karim Abbadi and Edward McBride’s Centiva Capital.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Mercury General Corporation (NYSE:MCY) but similarly valued. We will take a look at Proto Labs Inc (NYSE:PRLB), Atkore Inc. (NYSE:ATKR), Insight Enterprises, Inc. (NASDAQ:NSIT), PagerDuty, Inc. (NYSE:PD), Kennametal Inc. (NYSE:KMT), Merit Medical Systems, Inc. (NASDAQ:MMSI), and Fabrinet (NYSE:FN). This group of stocks’ market valuations resemble MCY’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $339 million. That figure was $179 million in MCY’s case. PagerDuty, Inc. (NYSE:PD) is the most popular stock in this table. On the other hand Kennametal Inc. (NYSE:KMT) is the least popular one with only 13 bullish hedge fund positions. Mercury General Corporation (NYSE:MCY) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MCY is 66.1. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and beat the market again by 7.7 percentage points. Unfortunately MCY wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on MCY were disappointed as the stock returned 2.5% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.