We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Scientific Games Corp (NASDAQ:SGMS) and compare it against similarly valued peers such as Ligand Pharmaceuticals Inc. (NASDAQ:LGND), AssetMark Financial Holdings, Inc. (NYSE:AMK), and Great Western Bancorp Inc (NYSE:GWB).
Is Scientific Games Corp (NASDAQ:SGMS) a sound investment now? Money managers are in a pessimistic mood. The number of long hedge fund bets went down by 2 in recent months. Our calculations also showed that SGMS 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.
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 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 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_255017" align="aligncenter" width="600"] David Einhorn of Greenlight Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the key hedge fund action encompassing Scientific Games Corp (NASDAQ:SGMS).
How are hedge funds trading Scientific Games Corp (NASDAQ:SGMS)?
Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the second quarter of 2019. By comparison, 25 hedge funds held shares or bullish call options in SGMS a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Fine Capital Partners, managed by Debra Fine, holds the biggest position in Scientific Games Corp (NASDAQ:SGMS). Fine Capital Partners has a $186 million position in the stock, comprising 41.9% of its 13F portfolio. The second largest stake is held by Sylebra Capital Management, led by Daniel Patrick Gibson, holding a $175.4 million position; the fund has 7.7% of its 13F portfolio invested in the stock. Remaining peers that hold long positions consist of Mark Cohen's Stone House Capital, David Einhorn's Greenlight Capital and Wilmot B. Harkey and Daniel Mack's Nantahala Capital Management. In terms of the portfolio weights assigned to each position Stone House Capital allocated the biggest weight to Scientific Games Corp (NASDAQ:SGMS), around 100% of its portfolio. Fine Capital Partners is also relatively very bullish on the stock, designating 41.95 percent of its 13F equity portfolio to SGMS.
Seeing as Scientific Games Corp (NASDAQ:SGMS) has witnessed declining sentiment from hedge fund managers, logic holds that there lies a certain "tier" of hedge funds that elected to cut their full holdings by the end of the third quarter. At the top of the heap, Alex Sacerdote's Whale Rock Capital Management sold off the largest stake of the "upper crust" of funds followed by Insider Monkey, totaling about $21.2 million in stock. Bernard Selz's fund, Selz Capital, also dropped its stock, about $1.7 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Scientific Games Corp (NASDAQ:SGMS) but similarly valued. We will take a look at Ligand Pharmaceuticals Inc. (NASDAQ:LGND), AssetMark Financial Holdings, Inc. (NYSE:AMK), Great Western Bancorp Inc (NYSE:GWB), and National Vision Holdings, Inc. (NASDAQ:EYE). All of these stocks' market caps match SGMS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LGND,20,371572,1 AMK,10,44658,10 GWB,11,46049,2 EYE,22,344437,1 Average,15.75,201679,3.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $202 million. That figure was $576 million in SGMS's case. National Vision Holdings, Inc. (NASDAQ:EYE) is the most popular stock in this table. On the other hand AssetMark Financial Holdings, Inc. (NYSE:AMK) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Scientific Games Corp (NASDAQ:SGMS) is more popular among hedge funds. 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. Hedge funds were also right about betting on SGMS as the stock returned 34.4% during the first two months of Q4 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.
Disclosure: None. This article was originally published at Insider Monkey.