Hedge Funds Are Selling State Auto Financial (STFC)

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Ackman’s recent Valeant losses). However, it is still good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards State Auto Financial (NASDAQ:STFC).

Is State Auto Financial (NASDAQ:STFC) a first-rate investment right now? The best stock pickers are selling. The number of long hedge fund positions shrunk by 3 in recent months. It is important to consider that the shares of State Auto Financial (NASDAQ:STFC) were down 4.76% through the third quarter. For a better understanding of hedge fund behavior, we will cover hedge funds holding positions in the company, at the end of September.

The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article, we will examine companies such as Textainer Group Holdings Limited (NYSE:TGH), Inogen Inc (NASDAQ:INGN), and Changyou.Com Ltd (ADR) (NASDAQ:CYOU) to gather more data points.

Today, there are plenty of tools shareholders put to use to size up publicly traded companies. Some of the best tools are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the top picks of the elite money managers can outperform the market by a significant margin (see the details here).

Now, let’s review the fresh action encompassing State Auto Financial (NASDAQ:STFC).

How have hedgies been trading State Auto Financial (NASDAQ:STFC)?

At the end of the third quarter, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a decline of 43% from the previous quarter. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Chuck Royce’s Royce & Associates has the largest position in State Auto Financial (NASDAQ:STFC), worth close to $11.9 million, amounting to 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Robert Jaffe of Force Capital, with a $6.4 million position; 1.3% of its 13F portfolio is allocated to the stock. Other professional money managers that are bullish consist of Ron Bobman’s Capital Returns Management, and Renaissance Technologies.

Because State Auto Financial (NASDAQ:STFC) has witnessed a declination in interest from hedge fund managers, we can see that there lies a certain “tier” of fund managers who sold off their positions entirely heading into Q4. Interestingly, John Overdeck and David Siegel’s Two Sigma Advisors dumped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth about $0.4 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund said goodbye to about $0.3 million worth of shares. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to State Auto Financial (NASDAQ:STFC). We will take a look at Textainer Group Holdings Limited (NYSE:TGH), Inogen Inc (NASDAQ:INGN), Changyou.Com Ltd (ADR) (NASDAQ:CYOU), and NetGear, Inc. (NASDAQ:NTGR). All of these stocks’ market caps match State Auto Financial (NASDAQ:STFC)’s market cap.

As you can see, these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $25 million in State Auto Financial (NASDAQ:STFC)’s case. NetGear, Inc. (NASDAQ:NTGR) is the most popular stock in this table. On the other hand, Textainer Group Holdings Limited (NYSE:TGH) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks, State Auto Financial (NASDAQ:STFC) is even less popular than Textainer Group Holdings Limited (NYSE:TGH). Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case, more research is warranted.