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Hedge Fund Darlings vs. SmileDirectClub, Inc. (SDC) In 2019

Nina Todic

Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards SmileDirectClub, Inc. (NASDAQ:SDC) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.

Is SmileDirectClub, Inc. (NASDAQ:SDC) a buy here? Prominent investors are getting more bullish. The number of bullish hedge fund bets rose by 28 in recent months. Our calculations also showed that SDC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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_256989" align="aligncenter" width="450"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]

Dmitry Balyasny of Balyasny Asset Managemnet

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 look at the recent hedge fund action surrounding SmileDirectClub, Inc. (NASDAQ:SDC).

What have hedge funds been doing with SmileDirectClub, Inc. (NASDAQ:SDC)?

Heading into the fourth quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 28 from the previous quarter. The graph below displays the number of hedge funds with bullish position in SDC over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the number one position in SmileDirectClub, Inc. (NASDAQ:SDC). Citadel Investment Group has a $41.9 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Hillhouse Capital Management, managed by Lei Zhang, which holds a $40.6 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions contain Israel Englander's Millennium Management, Steve Cohen's Point72 Asset Management and Dmitry Balyasny's Balyasny Asset Management. In terms of the portfolio weights assigned to each position Kamunting Street Capital allocated the biggest weight to SmileDirectClub, Inc. (NASDAQ:SDC), around 1.59% of its 13F portfolio. Element Capital Management is also relatively very bullish on the stock, setting aside 1.21 percent of its 13F equity portfolio to SDC.

As one would reasonably expect, key hedge funds were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, assembled the largest position in SmileDirectClub, Inc. (NASDAQ:SDC). Citadel Investment Group had $41.9 million invested in the company at the end of the quarter. Lei Zhang's Hillhouse Capital Management also made a $40.6 million investment in the stock during the quarter. The other funds with brand new SDC positions are Israel Englander's Millennium Management, Steve Cohen's Point72 Asset Management, and Dmitry Balyasny's Balyasny Asset Management.

Let's now review hedge fund activity in other stocks similar to SmileDirectClub, Inc. (NASDAQ:SDC). These stocks are Primerica, Inc. (NYSE:PRI), Aluminum Corporation of China Limited (NYSE:ACH), Parsley Energy Inc (NYSE:PE), and Trex Company, Inc. (NYSE:TREX). This group of stocks' market values are closest to SDC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PRI,23,340762,-3 ACH,3,4206,-2 PE,44,778914,8 TREX,18,104493,-1 Average,22,307094,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $307 million. That figure was $288 million in SDC's case. Parsley Energy Inc (NYSE:PE) is the most popular stock in this table. On the other hand Aluminum Corporation of China Limited (NYSE:ACH) is the least popular one with only 3 bullish hedge fund positions. SmileDirectClub, Inc. (NASDAQ:SDC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately SDC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SDC were disappointed as the stock returned -50% in 2019 (through December 23rd) 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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