We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Stepan Company (NYSE:SCL) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Stepan Company (NYSE:SCL) shareholders have witnessed a decrease in support from the world’s most elite money managers of late. Our calculations also showed that SCL isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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. 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 41 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.
David Harding of Winton Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a gander at the latest hedge fund action surrounding Stepan Company (NYSE:SCL).
What have hedge funds been doing with Stepan Company (NYSE:SCL)?
Heading into the first quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in SCL a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Stepan Company (NYSE:SCL) was held by Renaissance Technologies, which reported holding $39.1 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $14 million position. Other investors bullish on the company included AQR Capital Management, Winton Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Quantinno Capital allocated the biggest weight to Stepan Company (NYSE:SCL), around 0.38% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.05 percent of its 13F equity portfolio to SCL.
Due to the fact that Stepan Company (NYSE:SCL) has witnessed falling interest from hedge fund managers, it’s easy to see that there exists a select few money managers that elected to cut their full holdings in the third quarter. Intriguingly, Noam Gottesman’s GLG Partners cut the largest position of the 750 funds tracked by Insider Monkey, totaling about $2.2 million in stock. Donald Sussman’s fund, Paloma Partners, also sold off its stock, about $0.4 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 2 funds in the third quarter.
Let’s go over hedge fund activity in other stocks similar to Stepan Company (NYSE:SCL). We will take a look at First Bancorp (NYSE:FBP), ChemoCentryx Inc (NASDAQ:CCXI), WSFS Financial Corporation (NASDAQ:WSFS), and Sprouts Farmers Market Inc (NASDAQ:SFM). This group of stocks’ market valuations are similar to SCL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FBP | 32 | 194396 | 11 |
| CCXI | 23 | 531676 | 6 |
| WSFS | 16 | 174571 | 5 |
| SFM | 30 | 331285 | 4 |
| Average | 25.25 | 307982 | 6.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $308 million. That figure was $72 million in SCL’s case. First Bancorp (NYSE:FBP) is the most popular stock in this table. On the other hand WSFS Financial Corporation (NASDAQ:WSFS) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Stepan Company (NYSE:SCL) is even less popular than WSFS. 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 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on SCL, though not to the same extent, as the stock returned -19.9% during the same time period and outperformed the market as well.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
