Is United Community Financial Corp (UCFC) A Good Stock to Buy?

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. The Standard and Poor’s 500 Index returned 7.6% over the 12-month period ending November 21, while more than 51% of the constituents of the index underperformed the benchmark. Hence, a random stock picking process will most likely lead to disappointment. At the same time, the 30 most favored mid-cap stocks by the best performing hedge funds monitored by Insider Monkey generated a return of 18% over the same time span. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in United Community Financial Corp (NASDAQ:UCFC).

United Community Financial Corp (NASDAQ:UCFC) shares didn’t see a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds’ portfolios at the end of September, same as at the end of June. 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 Kadmon Holdings Inc (NYSE:KDMN), Spartan Motors Inc (NASDAQ:SPAR), and Jive Software Inc (NASDAQ:JIVE) to gather more data points.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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How are hedge funds trading United Community Financial Corp (NASDAQ:UCFC)?

At Q3’s end, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, unchanged from the second quarter of 2016. By comparison, 11 hedge funds held shares or bullish call options in UCFC heading into this year, which fell by 3 in Q2. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Emanuel J. Friedman’s EJF Capital has the biggest position in United Community Financial Corp (NASDAQ:UCFC), worth close to $10.7 million. Sitting at the No. 2 spot is Renaissance Technologies, one of the largest hedge funds in the world, with a $7.8 million position. Other members of the smart money with similar optimism include Fred Cummings’ Elizabeth Park Capital Management, Jeffrey Gendell’s Tontine Asset Management, and Neil Chriss’ Hutchin Hill Capital. 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-micro-cap stocks.

We view hedge fund activity in the stock as unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. 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 Arrowstreet Capital).

Let’s now review hedge fund activity in other stocks similar to United Community Financial Corp (NASDAQ:UCFC). We will take a look at Kadmon Holdings Inc (NYSE:KDMN), Spartan Motors Inc (NASDAQ:SPAR), Jive Software Inc (NASDAQ:JIVE), and Dorian LPG Ltd (NYSE:LPG). This group of stocks’ market caps are similar to UCFC’s market cap.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $34 million in UCFC’s case. Spartan Motors Inc (NASDAQ:SPAR) is the most popular stock in this table. On the other hand Dorian LPG Ltd (NYSE:LPG) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks United Community Financial Corp (NASDAQ:UCFC) is only as popular as LPG. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock.

Disclosure: None