Should You Avoid ScanSource, Inc. (SCSC)?

In this article we will take a look at whether hedge funds think ScanSource, Inc. (NASDAQ:SCSC) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

ScanSource, Inc. (NASDAQ:SCSC) investors should pay attention to a decrease in enthusiasm from smart money in recent months. Our calculations also showed that SCSC 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Marshall of Marshall Wace

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 we’re going to analyze the latest hedge fund action surrounding ScanSource, Inc. (NASDAQ:SCSC).

How are hedge funds trading ScanSource, Inc. (NASDAQ:SCSC)?

At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SCSC over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, Pzena Investment Management held the most valuable stake in ScanSource, Inc. (NASDAQ:SCSC), which was worth $32.8 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $5 million worth of shares. AQR Capital Management, Marshall Wace LLP, 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 Zebra Capital Management allocated the biggest weight to ScanSource, Inc. (NASDAQ:SCSC), around 0.47% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, dishing out 0.25 percent of its 13F equity portfolio to SCSC.

Because ScanSource, Inc. (NASDAQ:SCSC) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of money managers who were dropping their positions entirely heading into Q4. Interestingly, Ian Simm’s Impax Asset Management cut the biggest stake of the “upper crust” of funds watched by Insider Monkey, worth close to $2.6 million in stock, and Ali Motamed’s Invenomic Capital Management was right behind this move, as the fund dumped about $1.7 million worth. These transactions are interesting, as total hedge fund interest dropped by 1 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to ScanSource, Inc. (NASDAQ:SCSC). These stocks are Warrior Met Coal Inc. (NYSE:HCC), Vivint Solar Inc (NYSE:VSLR), P.H. Glatfelter Company (NYSE:GLT), and Costamare Inc (NYSE:CMRE). This group of stocks’ market caps resemble SCSC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $58 million. That figure was $53 million in SCSC’s case. Warrior Met Coal Inc. (NYSE:HCC) is the most popular stock in this table. On the other hand P.H. Glatfelter Company (NYSE:GLT) is the least popular one with only 11 bullish hedge fund positions. ScanSource, Inc. (NASDAQ:SCSC) 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. 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 and surpassed the market by 16.8 percentage points. Unfortunately SCSC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SCSC investors were disappointed as the stock returned 5.2% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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