Mercury Systems Inc (MRCY): Are Hedge Funds Right About This Stock?

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Is Mercury Systems Inc (NASDAQ:MRCY) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Mercury Systems Inc (NASDAQ:MRCY) was in 17 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 26. MRCY investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. There were 10 hedge funds in our database with MRCY holdings at the end of December. Our calculations also showed that MRCY 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.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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. With all of this in mind let’s analyze the latest hedge fund action regarding Mercury Systems Inc (NASDAQ:MRCY).

Do Hedge Funds Think MRCY Is A Good Stock To Buy Now?

At the end of March, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 70% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in MRCY a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, D E Shaw held the most valuable stake in Mercury Systems Inc (NASDAQ:MRCY), which was worth $31.8 million at the end of the fourth quarter. On the second spot was Marshall Wace LLP which amassed $17.2 million worth of shares. Citadel Investment Group, Millennium Management, and Sirios Capital Management 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 Sirios Capital Management allocated the biggest weight to Mercury Systems Inc (NASDAQ:MRCY), around 0.57% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, earmarking 0.25 percent of its 13F equity portfolio to MRCY.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Sirios Capital Management, managed by John Brennan, initiated the most outsized position in Mercury Systems Inc (NASDAQ:MRCY). Sirios Capital Management had $6.8 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $5.1 million position during the quarter. The following funds were also among the new MRCY investors: Steve Cohen’s Point72 Asset Management, Paul Tudor Jones’s Tudor Investment Corp, and Michael Gelband’s ExodusPoint Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Mercury Systems Inc (NASDAQ:MRCY) but similarly valued. We will take a look at MACOM Technology Solutions Holdings Inc (NASDAQ:MTSI), W.R. Grace & Co. (NYSE:GRA), BigCommerce Holdings, Inc. (NASDAQ:BIGC), H&R Block, Inc. (NYSE:HRB), Atotech Limited (NYSE:ATC), Goosehead Insurance, Inc. (NASDAQ:GSHD), and The Brink’s Company (NYSE:BCO). This group of stocks’ market values are similar to MRCY’s market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MTSI,30,201129,6 GRA,43,1434037,3 BIGC,26,505108,0 HRB,27,228558,4 ATC,17,69894,17 GSHD,24,162339,3 BCO,24,406832,-2 Average,27.3,429700,4.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.3 hedge funds with bullish positions and the average amount invested in these stocks was $430 million. That figure was $111 million in MRCY’s case. W.R. Grace & Co. (NYSE:GRA) is the most popular stock in this table. On the other hand Atotech Limited (NYSE:ATC) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Mercury Systems Inc (NASDAQ:MRCY) is even less popular than ATC. Our overall hedge fund sentiment score for MRCY is 29.6. 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. Hedge funds dodged a bullet by taking a bearish stance towards MRCY. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd but managed to beat the market again by 10.1 percentage points. Unfortunately MRCY wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); MRCY investors were disappointed as the stock returned -5.9% since the end of the first quarter (through 7/23) 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 most of these stocks already outperformed the market since 2019.

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