Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Seacoast Banking Corporation of Florida (NASDAQ:SBCF).
Hedge fund interest in Seacoast Banking Corporation of Florida (NASDAQ:SBCF) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Veritex Holdings Inc (NASDAQ:VBTX), Independence Realty Trust Inc (NYSE:IRT), and DineEquity Inc (NYSE:DIN) to gather more data points. Our calculations also showed that SBCF 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.
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 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 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.
Chuck Royce of Royce & Associates
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. Keeping this in mind let’s take a look at the new hedge fund action surrounding Seacoast Banking Corporation of Florida (NASDAQ:SBCF).
How have hedgies been trading Seacoast Banking Corporation of Florida (NASDAQ:SBCF)?
At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SBCF over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Royce & Associates was the largest shareholder of Seacoast Banking Corporation of Florida (NASDAQ:SBCF), with a stake worth $9 million reported as of the end of September. Trailing Royce & Associates was Millennium Management, which amassed a stake valued at $6.5 million. Mendon Capital Advisors, GAMCO Investors, and Weld 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 Mendon Capital Advisors allocated the biggest weight to Seacoast Banking Corporation of Florida (NASDAQ:SBCF), around 1.01% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.08 percent of its 13F equity portfolio to SBCF.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Basswood 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Citadel Investment Group).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Seacoast Banking Corporation of Florida (NASDAQ:SBCF) but similarly valued. These stocks are Veritex Holdings Inc (NASDAQ:VBTX), Independence Realty Trust Inc (NYSE:IRT), DineEquity Inc (NYSE:DIN), and Seacoast Banking Corporation of Florida (NASDAQ:SBCF). This group of stocks’ market values are closest to SBCF’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VBTX | 9 | 85782 | 1 |
| IRT | 12 | 95303 | 4 |
| DIN | 15 | 152183 | 0 |
| SBCF | 6 | 22958 | 0 |
| Average | 10.5 | 89057 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $89 million. That figure was $23 million in SBCF’s case. DineEquity Inc (NYSE:DIN) is the most popular stock in this table. On the other hand Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is even less popular than SBCF. Hedge funds clearly dropped the ball on SBCF as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on SBCF as the stock returned 17.5% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
