Should You Avoid Stonegate Mortgage Corp (SGM)?

Insider Monkey finished processing more than 700 13F filings made by hedge funds and prominent investors. These filings show these funds’ portfolio positions as of September 30. In this article we are going to take a look at smart money sentiment towards Stonegate Mortgage Corp (NYSE:SGM).

Stonegate Mortgage Corp (NYSE:SGM) investors should pay attention to a decrease in enthusiasm from smart money in recent months. SGM was in 9 hedge funds’ portfolios at the end of the third quarter of 2015. There were 10 hedge funds in our database with SGM positions at the end of the previous quarter. 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 Journal Media Group Inc (NYSE:JMG), USA Truck, Inc. (NASDAQ:USAK), and Guidance Software, Inc. (NASDAQ:GUID) to gather more data points.

To most investors, hedge funds are seen as slow, outdated investment tools of years past. While there are greater than 8000 funds trading at the moment, Our experts look at the elite of this club, approximately 700 funds. It is estimated that this group of investors shepherd most of the hedge fund industry’s total capital, and by tailing their highest performing investments, Insider Monkey has come up with a few investment strategies that have historically exceeded the market. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Keeping this in mind, let’s take a peek at the key action encompassing Stonegate Mortgage Corp (NYSE:SGM).

How are hedge funds trading Stonegate Mortgage Corp (NYSE:SGM)?

At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the second quarter. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, John Khoury’s Long Pond Capital has the biggest position in Stonegate Mortgage Corp (NYSE:SGM), worth close to $17.9 million, comprising 0.8% of its total 13F portfolio. Sitting at the No. 2 spot is Second Curve Capital, led by Tom Brown, holding an $12.3 million position; the fund has 5.5% of its 13F portfolio invested in the stock. Some other peers that hold long positions encompass John Osterweis’s Osterweis Capital Management, Andy Redleaf’s Whitebox Advisors and Ari Zweiman’s 683 Capital Partners.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: BlueCrest Capital Mgmt. 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 none of the 700+ hedge funds tracked by Insider Monkey identified SGM as a viable investment and initiated a position in the stock.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Stonegate Mortgage Corp (NYSE:SGM) but similarly valued. We will take a look at Journal Media Group Inc (NYSE:JMG), USA Truck, Inc. (NASDAQ:USAK), Guidance Software, Inc. (NASDAQ:GUID), and Quantum Corp (NYSE:QTM). This group of stocks’ market valuations are closest to SGM’s market valuation.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $34 million. That figure was $53 million in SGM’s case. Quantum Corp (NYSE:QTM) is the most popular stock in this table. On the other hand Guidance Software, Inc. (NASDAQ:GUID) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Stonegate Mortgage Corp (NYSE:SGM) is even less popular than GUID. 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.