It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like The L.S. Starrett Company (NYSE:SCX).
The L.S. Starrett Company (NYSE:SCX) was in 4 hedge funds’ portfolios at the end of September. SCX has seen a decrease in hedge fund interest of late. There were 5 hedge funds in our database with SCX positions at the end of the previous quarter. Our calculations also showed that SCX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a gander at the new hedge fund action encompassing The L.S. Starrett Company (NYSE:SCX).
Hedge fund activity in The L.S. Starrett Company (NYSE:SCX)
Heading into the fourth quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the second quarter of 2019. On the other hand, there were a total of 4 hedge funds with a bullish position in SCX a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Renaissance Technologies has the most valuable position in The L.S. Starrett Company (NYSE:SCX), worth close to $2.8 million, comprising less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Mario Gabelli of GAMCO Investors, with a $1.8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that hold long positions encompass Chuck Royce’s Royce & Associates, Frederick DiSanto’s Ancora Advisors and . In terms of the portfolio weights assigned to each position GAMCO Investors allocated the biggest weight to The L.S. Starrett Company (NYSE:SCX), around 0.02% of its 13F portfolio. Ancora Advisors is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to SCX.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Springbok Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified SCX as a viable investment and initiated a position in the stock.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The L.S. Starrett Company (NYSE:SCX) but similarly valued. We will take a look at ImmuCell Corporation (NASDAQ:ICCC), China Jo Jo Drugstores Inc (NASDAQ:CJJD), Surface Oncology, Inc. (NASDAQ:SURF), and Lazydays Holdings, Inc. (NASDAQ:LAZY). All of these stocks’ market caps resemble SCX’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ICCC | 4 | 1558 | 0 |
| CJJD | 4 | 8490 | 0 |
| SURF | 5 | 4909 | -2 |
| LAZY | 5 | 8105 | 0 |
| Average | 4.5 | 5766 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $6 million in SCX’s case. Surface Oncology, Inc. (NASDAQ:SURF) is the most popular stock in this table. On the other hand ImmuCell Corporation (NASDAQ:ICCC) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks The L.S. Starrett Company (NYSE:SCX) is even less popular than ICCC. Hedge funds dodged a bullet by taking a bearish stance towards SCX. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SCX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SCX investors were disappointed as the stock returned 0.7% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
