Is SEM A Good Stock To Buy Now According To Hedge Funds?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 817 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of September 30th, about a month before the elections. In this article we look at what those investors think of Select Medical Holdings Corporation (NYSE:SEM).

Is SEM a good stock to buy now? Select Medical Holdings Corporation (NYSE:SEM) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 22 hedge funds’ portfolios at the end of September. Our calculations also showed that SEM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare SEM to other stocks including Laureate Education, Inc. (NASDAQ:LAUR), United Bankshares, Inc. (NASDAQ:UBSI), and FireEye Inc (NASDAQ:FEYE) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 66 percentage points since March 2017 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. Now we’re going to analyze the recent hedge fund action regarding Select Medical Holdings Corporation (NYSE:SEM).

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

At third quarter’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 20 hedge funds held shares or bullish call options in SEM a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in Select Medical Holdings Corporation (NYSE:SEM) was held by Point72 Asset Management, which reported holding $49.1 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $20 million position. Other investors bullish on the company included Deerfield Management, Royce & Associates, and GLG Partners. In terms of the portfolio weights assigned to each position Sivik Global Healthcare allocated the biggest weight to Select Medical Holdings Corporation (NYSE:SEM), around 0.94% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, designating 0.29 percent of its 13F equity portfolio to SEM.

Since Select Medical Holdings Corporation (NYSE:SEM) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedgies that slashed their full holdings in the third quarter. Interestingly, Greg Eisner’s Engineers Gate Manager sold off the biggest investment of the “upper crust” of funds watched by Insider Monkey, valued at about $1.8 million in stock, and David Harding’s Winton Capital Management was right behind this move, as the fund dumped about $1 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to Select Medical Holdings Corporation (NYSE:SEM). We will take a look at Laureate Education, Inc. (NASDAQ:LAUR), United Bankshares, Inc. (NASDAQ:UBSI), FireEye Inc (NASDAQ:FEYE), Trupanion Inc (NASDAQ:TRUP), Mantech International Corp (NASDAQ:MANT), Blackbaud, Inc. (NASDAQ:BLKB), and Valley National Bancorp (NASDAQ:VLY). This group of stocks’ market valuations are similar to SEM’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.4 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $115 million in SEM’s case. FireEye Inc (NASDAQ:FEYE) is the most popular stock in this table. On the other hand Trupanion Inc (NASDAQ:TRUP) is the least popular one with only 12 bullish hedge fund positions. Select Medical Holdings Corporation (NYSE:SEM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SEM is 61.6. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on SEM as the stock returned 22.7% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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