Should You Avoid Ship Finance International Limited (SFL)?

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.

Ship Finance International Limited (NYSE:SFL) investors should be aware of a decrease in support from the world’s most successful money managers of late. There were 8 hedge funds in our database with SFL positions at the end of September. At the end of this article we will also compare SFL to other stocks including Chesapeake Lodging Trust (NYSE:CHSP), Rambus Inc. (NASDAQ:RMBS), and Actuant Corporation (NYSE:ATU) to get a better sense of its popularity.

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 Ship Finance International Limited (NYSE:SFL)?

At the end of the third quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, down by 38% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in SFL at the beginning of this year. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Graham Capital Management, led by Kenneth Tropin, holds the largest position in Ship Finance International Limited (NYSE:SFL). Graham Capital Management has a $27 million position in the stock. The second most bullish fund manager is PEAK6 Capital Management, led by Matthew Hulsizer, which holds a $7.2 million call position. Remaining peers that hold long positions consist of Roger Ibbotson’s Zebra Capital Management and George Hall’a Clinton Group. 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-microcap stocks.

Due to the fact that Ship Finance International Limited (NYSE:SFL) has experienced falling interest from hedge fund managers, we can see that there is a sect of fund managers that decided to sell off their full holdings in the third quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest investment of the 700 funds monitored by Insider Monkey, totaling close to $9.2 million in stock. Ken Griffin’s fund, Citadel Investment Group, also said goodbye to its call options, about $1.4 million worth.

Let’s also examine hedge fund activity in other stocks similar to Ship Finance International Limited (NYSE:SFL). These stocks are Chesapeake Lodging Trust (NYSE:CHSP), Rambus Inc. (NASDAQ:RMBS), Actuant Corporation (NYSE:ATU), and TeleTech Holdings, Inc. (NASDAQ:TTEC). This group of stocks’ market valuations are closest to SFL’s market valuation.

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 $82 million. That figure was $48 million in SFL’s case. Actuant Corporation (NYSE:ATU) is the most popular stock in this table. On the other hand TeleTech Holdings, Inc. (NASDAQ:TTEC) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Ship Finance International Limited (NYSE:SFL) is even less popular than TTEC. 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. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None