Is ScanSource, Inc. (SCSC) Going to Burn These Hedge Funds?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about ScanSource, Inc. (NASDAQ:SCSC).

ScanSource, Inc. (NASDAQ:SCSC) investors should be aware of a decrease in activity from the world’s largest hedge funds recently. ScanSource, Inc. (NASDAQ:SCSC) was in 10 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 17. There were 11 hedge funds in our database with SCSC positions at the end of the first quarter. Our calculations also showed that SCSC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.

Peter Rathjens of Arrowstreet Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV 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 peek at the latest hedge fund action regarding ScanSource, Inc. (NASDAQ:SCSC).

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

At the end of June, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in SCSC over the last 24 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Pzena Investment Management was the largest shareholder of ScanSource, Inc. (NASDAQ:SCSC), with a stake worth $45 million reported as of the end of June. Trailing Pzena Investment Management was Arrowstreet Capital, which amassed a stake valued at $4.8 million. AQR Capital Management, D E Shaw, and Citadel Investment Group 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 Pzena Investment Management allocated the biggest weight to ScanSource, Inc. (NASDAQ:SCSC), around 0.18% of its 13F portfolio. Value Holdings LP is also relatively very bullish on the stock, designating 0.08 percent of its 13F equity portfolio to SCSC.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. 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 SCSC as a viable investment and initiated a position in the stock.

Let’s check out hedge fund activity in other stocks similar to ScanSource, Inc. (NASDAQ:SCSC). These stocks are National Presto Industries Inc. (NYSE:NPK), Passage Bio, Inc. (NASDAQ:PASG), Stereotaxis Inc (NYSE:STXS), Cara Therapeutics Inc (NASDAQ:CARA), Camden National Corporation (NASDAQ:CAC), Winmark Corporation (NASDAQ:WINA), and Global Ship Lease, Inc. (NYSE:GSL). All of these stocks’ market caps resemble SCSC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.6 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $56 million in SCSC’s case. Stereotaxis Inc (NYSE:STXS) is the most popular stock in this table. On the other hand National Presto Industries Inc. (NYSE:NPK) is the least popular one with only 6 bullish hedge fund positions. ScanSource, Inc. (NASDAQ:SCSC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SCSC is 35. 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 25.7% in 2021 through September 27th and still beat the market by 6.2 percentage points. A small number of hedge funds were also right about betting on SCSC as the stock returned 31.8% since the end of the second quarter (through 9/27) and outperformed the market by an even larger margin.

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