Is MSC Industrial Direct Co Inc (MSM) A Good Stock To Buy?

Reymerlyn Martin

Fri, Jun 28, 2019, 7:15 PM

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 MSC Industrial Direct Co Inc (NYSE:MSM).

MSC Industrial Direct Co Inc (NYSE:MSM) investors should pay attention to a decrease in support from the world's most elite money managers in recent months. Our calculations also showed that MSM isn't among the 30 most popular stocks among hedge funds.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

We're going to take a glance at the latest hedge fund action regarding MSC Industrial Direct Co Inc (NYSE:MSM).

Hedge fund activity in MSC Industrial Direct Co Inc (NYSE:MSM)

At Q1's end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -33% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MSM over the last 15 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

The largest stake in MSC Industrial Direct Co Inc (NYSE:MSM) was held by AQR Capital Management, which reported holding $28.6 million worth of stock at the end of March. It was followed by D E Shaw with a $14.9 million position. Other investors bullish on the company included Winton Capital Management, Renaissance Technologies, and Two Sigma Advisors.

Judging by the fact that MSC Industrial Direct Co Inc (NYSE:MSM) has experienced falling interest from the smart money, it's safe to say that there was a specific group of hedgies who were dropping their positions entirely heading into Q3. Interestingly, Matt Simon (Citadel)'s Ashler Capital sold off the biggest investment of the 700 funds watched by Insider Monkey, comprising an estimated $50.8 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also sold off its stock, about $2.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 7 funds heading into Q3.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as MSC Industrial Direct Co Inc (NYSE:MSM) but similarly valued. We will take a look at NovoCure Limited (NASDAQ:NVCR), Carter's, Inc. (NYSE:CRI), Assured Guaranty Ltd. (NYSE:AGO), and Medidata Solutions Inc (NASDAQ:MDSO). This group of stocks' market valuations are similar to MSM's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NVCR,25,331474,8 CRI,19,278631,-3 AGO,34,559263,1 MDSO,16,214798,5 Average,23.5,346042,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $346 million. That figure was $75 million in MSM's case. Assured Guaranty Ltd. (NYSE:AGO) is the most popular stock in this table. On the other hand Medidata Solutions Inc (NASDAQ:MDSO) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks MSC Industrial Direct Co Inc (NYSE:MSM) is even less popular than MDSO. Hedge funds dodged a bullet by taking a bearish stance towards MSM. Our calculations showed that the top 20 most popular hedge fund stocks returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately MSM wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MSM investors were disappointed as the stock returned -12.1% during the same time frame 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 13 of these stocks already outperformed the market so far in the second quarter.

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

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