"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Steel Connect, Inc. (NASDAQ:STCN) and see how it was affected.
Steel Connect, Inc. (NASDAQ:STCN) investors should be aware of an increase in support from the world's most elite money managers in recent months. Our calculations also showed that STCN isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to 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 hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_530601" align="alignnone" width="600"] Warren Lichtenstein of Steel Partners[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's take a peek at the fresh hedge fund action encompassing Steel Connect, Inc. (NASDAQ:STCN).
What does smart money think about Steel Connect, Inc. (NASDAQ:STCN)?
Heading into the fourth quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in STCN over the last 17 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, Steel Partners held the most valuable stake in Steel Connect, Inc. (NASDAQ:STCN), which was worth $31.8 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $3.5 million worth of shares. GAMCO Investors, Solas Capital Management, and Citadel Investment Group 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 Steel Partners allocated the biggest weight to Steel Connect, Inc. (NASDAQ:STCN), around 11.43% of its 13F portfolio. Solas Capital Management is also relatively very bullish on the stock, setting aside 1.21 percent of its 13F equity portfolio to STCN.
There weren't any hedge funds initiating brand new positions in the stock during the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Steel Connect, Inc. (NASDAQ:STCN) but similarly valued. We will take a look at HC2 Holdings Inc (NYSE:HCHC), Vaccinex, Inc. (NASDAQ:VCNX), Riverview Financial Corporation (NASDAQ:RIVE), and Menlo Therapeutics Inc. (NASDAQ:MNLO). This group of stocks' market caps resemble STCN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HCHC,14,4588,-1 VCNX,2,9256,1 RIVE,5,9321,2 MNLO,9,40281,-1 Average,7.5,15862,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $38 million in STCN's case. HC2 Holdings Inc (NYSE:HCHC) is the most popular stock in this table. On the other hand Vaccinex, Inc. (NASDAQ:VCNX) is the least popular one with only 2 bullish hedge fund positions. Steel Connect, Inc. (NASDAQ:STCN) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately STCN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); STCN investors were disappointed as the stock returned -17.7% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.