Is Select Comfort Corp. (SCSS) A Good Stock To Buy?

Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Is Select Comfort Corp. (NASDAQ:SCSS) ready to rally soon? The best stock pickers are indeed in a bearish mood. The number of bullish hedge fund positions slashed by 1 in recent months. There were 11 hedge funds in our database with SCSS positions at the end of the 2016 third quarter. At the end of this article we will also compare SCSS to other stocks including Mercury Systems Inc (NASDAQ:MRCY), Luminex Corporation (NASDAQ:LMNX), and State Auto Financial (NASDAQ:STFC) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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With all of this in mind, we’re going to take a look at the fresh action surrounding Select Comfort Corp. (NASDAQ:SCSS).

How have hedgies been trading Select Comfort Corp. (NASDAQ:SCSS)?

Heading into the fourth quarter of 2016, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a drop of 8% from the second quarter of 2016. On the other hand, there were a total of 19 hedge funds with a bullish position in SCSS at the beginning of this year. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Adam Wright and Gary Kohler’s Blue Clay Capital has the most valuable position in Select Comfort Corp. (NASDAQ:SCSS), worth close to $17.6 million, amounting to 23.4% of its total 13F portfolio. On Blue Clay Capital’s heels is John Ku of Manor Road Capital Partners, with a $15.7 million position; 2.2% of its 13F portfolio is allocated to the stock. Other professional money managers that hold long positions include Daniel Beltzman and Gergory Smith’s Birch Run Capital, D E Shaw, one of the largest hedge funds in the world, and Steve Cohen’s Point72 Asset Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Now that we’ve mentioned the most bullish investors, let’s also take a look at some funds that cut their entire stakes in the stock during the third quarter. It’s worth mentioning that David Costen Haley’s HBK Investments cut the biggest position of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $1.7 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund dumped about $0.8 million worth of Select Comfort Corp. (NASDAQ:SCSS) shares.

Let’s also examine hedge fund activity in other stocks similar to Select Comfort Corp. (NASDAQ:SCSS). We will take a look at Mercury Systems Inc (NASDAQ:MRCY), Luminex Corporation (NASDAQ:LMNX), State Auto Financial (NASDAQ:STFC), and Scientific Games Corp (NASDAQ:SGMS). All of these stocks’ market caps are closest to SCSS’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 $145 million. That figure was $72 million in SCSS’s case. Scientific Games Corp (NASDAQ:SGMS) is the most popular stock in this table. On the other hand State Auto Financial (NASDAQ:STFC) is the least popular one with only 4 bullish hedge fund positions. Select Comfort Corp. (NASDAQ:SCSS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard SGMS might be a better candidate to consider taking a long position in.

Disclosure: none.