Should You Avoid Harsco Corporation (HSC)?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Harsco Corporation (NYSE:HSC).

Harsco Corporation (NYSE:HSC) was in 16 hedge funds’ portfolios at the end of March. HSC investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. There were 21 hedge funds in our database with HSC positions at the end of the previous quarter. Our calculations also showed that HSC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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 58 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.

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology’s influence will go beyond online payments. So, we are checking out this futurist’s moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s view the fresh hedge fund action surrounding Harsco Corporation (NYSE:HSC).

What have hedge funds been doing with Harsco Corporation (NYSE:HSC)?

At Q1’s end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in HSC over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Adage Capital Management held the most valuable stake in Harsco Corporation (NYSE:HSC), which was worth $26.5 million at the end of the third quarter. On the second spot was Encompass Capital Advisors which amassed $11.1 million worth of shares. Select Equity Group, Arrowstreet Capital, and D E Shaw 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 North Run Capital allocated the biggest weight to Harsco Corporation (NYSE:HSC), around 3.8% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, earmarking 1.19 percent of its 13F equity portfolio to HSC.

Judging by the fact that Harsco Corporation (NYSE:HSC) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few funds that elected to cut their positions entirely in the first quarter. It’s worth mentioning that Alexander Mitchell’s Scopus Asset Management dumped the biggest position of all the hedgies watched by Insider Monkey, worth about $15.3 million in stock. Jeffrey Moskowitz’s fund, Harvey Partners, also dumped its stock, about $5.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 5 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Harsco Corporation (NYSE:HSC). We will take a look at Forrester Research, Inc. (NASDAQ:FORR), BrightSphere Investment Group Inc (NYSE:BSIG), Usa Compression Partners LP (NYSE:USAC), and Lakeland Bancorp, Inc. (NASDAQ:LBAI). This group of stocks’ market valuations are similar to HSC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $67 million. That figure was $65 million in HSC’s case. BrightSphere Investment Group Inc (NYSE:BSIG) is the most popular stock in this table. On the other hand Usa Compression Partners LP (NYSE:USAC) is the least popular one with only 5 bullish hedge fund positions. Harsco Corporation (NYSE:HSC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on HSC as the stock returned 87.8% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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