At Insider Monkey, we pore over the filings of nearly 750 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we've gathered as a result gives us access to a wealth of collective knowledge based on these firms' portfolio holdings as of September 30. In this article, we will use that wealth of knowledge to determine whether or not Safeguard Scientifics, Inc (NYSE:SFE) makes for a good investment right now.
Is Safeguard Scientifics, Inc (NYSE:SFE) ready to rally soon? Investors who are in the know are betting on the stock. The number of long hedge fund positions increased by 4 recently. Our calculations also showed that SFE isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). SFE was in 10 hedge funds' portfolios at the end of September. There were 6 hedge funds in our database with SFE holdings at the end of the previous quarter. 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_731890" align="aligncenter" width="600"] John Rogers of Ariel Investments[/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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's take a peek at the recent hedge fund action surrounding Safeguard Scientifics, Inc (NYSE:SFE).
How are hedge funds trading Safeguard Scientifics, Inc (NYSE:SFE)?
At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 67% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SFE 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.
More specifically, Prescott Group Capital Management was the largest shareholder of Safeguard Scientifics, Inc (NYSE:SFE), with a stake worth $7.5 million reported as of the end of September. Trailing Prescott Group Capital Management was Almitas Capital, which amassed a stake valued at $7.2 million. Ariel Investments, Renaissance Technologies, and Winton Capital Management 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 Almitas Capital allocated the biggest weight to Safeguard Scientifics, Inc (NYSE:SFE), around 7.75% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, designating 2.3 percent of its 13F equity portfolio to SFE.
Now, specific money managers were breaking ground themselves. Winton Capital Management, managed by David Harding, created the biggest position in Safeguard Scientifics, Inc (NYSE:SFE). Winton Capital Management had $1.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also made a $0.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Gregg J. Powers's Private Capital Management and Paul Marshall and Ian Wace's Marshall Wace.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Safeguard Scientifics, Inc (NYSE:SFE) but similarly valued. These stocks are Gravity Co., LTD. (NASDAQ:GRVY), Bioceres Crop Solutions Corp. (NYSEAMERICAN:BIOX), MVB Financial Corp. (NASDAQ:MVBF), and Akoustis Technologies, Inc. (NASDAQ:AKTS). This group of stocks' market valuations resemble SFE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GRVY,3,2578,-3 BIOX,3,261,-1 MVBF,4,25454,1 AKTS,6,4784,2 Average,4,8269,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $26 million in SFE's case. Akoustis Technologies, Inc. (NASDAQ:AKTS) is the most popular stock in this table. On the other hand Gravity Co., LTD. (NASDAQ:GRVY) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Safeguard Scientifics, Inc (NYSE:SFE) 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. Unfortunately SFE wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SFE were disappointed as the stock returned 1.6% 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.