We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 835 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about The Scotts Miracle-Gro Company (NYSE:SMG) in this article.
The Scotts Miracle-Gro Company (NYSE:SMG) was in 31 hedge funds' portfolios at the end of the fourth quarter of 2019. SMG investors should be aware of a decrease in support from the world's most elite money managers in recent months. There were 34 hedge funds in our database with SMG holdings at the end of the previous quarter. Our calculations also showed that SMG isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
[caption id="attachment_193030" align="aligncenter" width="400"] Tom Gayner of Markel Gayner Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now we're going to take a look at the new hedge fund action regarding The Scotts Miracle-Gro Company (NYSE:SMG).
What does smart money think about The Scotts Miracle-Gro Company (NYSE:SMG)?
At Q4's end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SMG 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.
The largest stake in The Scotts Miracle-Gro Company (NYSE:SMG) was held by Fisher Asset Management, which reported holding $122.6 million worth of stock at the end of September. It was followed by Markel Gayner Asset Management with a $44.8 million position. Other investors bullish on the company included Hudson Executive Capital, Renaissance Technologies, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Hudson Executive Capital allocated the biggest weight to The Scotts Miracle-Gro Company (NYSE:SMG), around 3.4% of its 13F portfolio. Kehrs Ridge Capital is also relatively very bullish on the stock, dishing out 1.34 percent of its 13F equity portfolio to SMG.
Judging by the fact that The Scotts Miracle-Gro Company (NYSE:SMG) has experienced falling interest from the aggregate hedge fund industry, it's easy to see that there exists a select few funds that elected to cut their full holdings heading into Q4. Intriguingly, David Harding's Winton Capital Management dropped the largest position of the 750 funds tracked by Insider Monkey, worth an estimated $40.6 million in stock. Philippe Laffont's fund, Coatue Management, also sold off its stock, about $1.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds heading into Q4.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as The Scotts Miracle-Gro Company (NYSE:SMG) but similarly valued. We will take a look at BWX Technologies Inc (NYSE:BWXT), Lincoln Electric Holdings, Inc. (NASDAQ:LECO), First Solar, Inc. (NASDAQ:FSLR), and Gildan Activewear Inc (NYSE:GIL). This group of stocks' market valuations resemble SMG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BWXT,22,81924,-3 LECO,16,245514,-2 FSLR,24,140318,-8 GIL,22,430332,2 Average,21,224522,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $225 million. That figure was $365 million in SMG's case. First Solar, Inc. (NASDAQ:FSLR) is the most popular stock in this table. On the other hand Lincoln Electric Holdings, Inc. (NASDAQ:LECO) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks The Scotts Miracle-Gro Company (NYSE:SMG) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but still managed to beat the market by 4.2 percentage points. Hedge funds were also right about betting on SMG as the stock returned -3.4% so far in 2020 (through April 6th) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.