Do Hedge Funds Love Steel Connect, Inc. (STCN)?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Steel Connect, Inc. (NASDAQ:STCN) to find out whether there were any major changes in hedge funds’ views.

Steel Connect, Inc. (NASDAQ:STCN) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 4 hedge funds’ portfolios at the end of March. Our calculations also showed that STCN isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). At the end of this article we will also compare STCN to other stocks including SEACOR Marine Holdings Inc. (NYSE:SMHI), Bank of South Carolina Corp. (NASDAQ:BKSC), and Minerva Neurosciences, Inc (NASDAQ:NERV) to get a better sense of its popularity.

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 S&P 500 ETFs by 115 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.

Warren Lichtenstein of Steel Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $27 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. 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. With all of this in mind let’s take a look at the recent hedge fund action encompassing Steel Connect, Inc. (NASDAQ:STCN).

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

At the end of the first quarter, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STCN over the last 23 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Warren Lichtenstein’s Steel Partners has the biggest position in Steel Connect, Inc. (NASDAQ:STCN), worth close to $16.7 million, comprising 6% of its total 13F portfolio. On Steel Partners’s heels is Steel Partners, managed by Warren Lichtenstein, which holds a $14.9 million position; the fund has 5.3% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish encompass Renaissance Technologies, Warren Lichtenstein’s Steel Partners and Mario Gabelli’s GAMCO Investors. In terms of the portfolio weights assigned to each position Steel Partners allocated the biggest weight to Steel Connect, Inc. (NASDAQ:STCN), around 5.97% of its 13F portfolio. Steel Partners is also relatively very bullish on the stock, setting aside 5.3 percent of its 13F equity portfolio to STCN.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Steel Connect, Inc. (NASDAQ:STCN) but similarly valued. These stocks are SEACOR Marine Holdings Inc. (NYSE:SMHI), Bank of South Carolina Corp. (NASDAQ:BKSC), Minerva Neurosciences, Inc (NASDAQ:NERV), Longeveron Inc. (NASDAQ:LGVN), LAIX Inc. (NYSE:LAIX), Check-Cap Ltd. (NASDAQ:CHEK), and United States Antimony Corporation (NYSE:UAMY). This group of stocks’ market caps are closest to STCN’s market cap.

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As you can see these stocks had an average of 3.1 hedge funds with bullish positions and the average amount invested in these stocks was $2 million. That figure was $45 million in STCN’s case. Minerva Neurosciences, Inc (NASDAQ:NERV) is the most popular stock in this table. On the other hand Bank of South Carolina Corp. (NASDAQ:BKSC) is the least popular one with only 1 bullish hedge fund positions. Steel Connect, Inc. (NASDAQ:STCN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for STCN is 41.7. 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. 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 17.2% in 2021 through June 11th and still beat the market by 3.3 percentage points. Hedge funds were also right about betting on STCN as the stock returned 10.1% since the end of Q1 (through 6/11) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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