It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of 4 percentage points during the first 9 months of 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in ScanSource, Inc. (NASDAQ:SCSC).
ScanSource, Inc. (NASDAQ:SCSC) has experienced a decrease in hedge fund sentiment of late. Our calculations also showed that SCSC isn't among the 30 most popular stocks among hedge funds (see the video below). 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a peek at the fresh hedge fund action surrounding ScanSource, Inc. (NASDAQ:SCSC).
What does smart money think about ScanSource, Inc. (NASDAQ:SCSC)?
At the end of the second quarter, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SCSC over the last 16 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Pzena Investment Management, managed by Richard S. Pzena, holds the biggest position in ScanSource, Inc. (NASDAQ:SCSC). Pzena Investment Management has a $40.6 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is AQR Capital Management, managed by Cliff Asness, which holds a $5.7 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Some other professional money managers that are bullish comprise D. E. Shaw's D E Shaw, Ken Griffin's Citadel Investment Group and John Overdeck and David Siegel's Two Sigma Advisors.
Judging by the fact that ScanSource, Inc. (NASDAQ:SCSC) has witnessed declining sentiment from hedge fund managers, logic holds that there lies a certain "tier" of hedge funds that decided to sell off their full holdings last quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital sold off the biggest position of all the hedgies monitored by Insider Monkey, valued at close to $0.2 million in stock. Andrew Feldstein and Stephen Siderow's fund, Blue Mountain Capital, also cut its stock, about $0.2 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 2 funds last quarter.
Let's now review hedge fund activity in other stocks similar to ScanSource, Inc. (NASDAQ:SCSC). These stocks are Fluidigm Corporation (NASDAQ:FLDM), NorthStar Realty Europe Corp. (NYSE:NRE), ViewRay, Inc. (NASDAQ:VRAY), and US Concrete Inc (NASDAQ:USCR). All of these stocks' market caps are closest to SCSC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FLDM,17,137031,-2 NRE,12,100119,3 VRAY,17,347601,-6 USCR,17,91942,0 Average,15.75,169173,-1.25 [/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 $169 million. That figure was $52 million in SCSC's case. Fluidigm Corporation (NASDAQ:FLDM) is the most popular stock in this table. On the other hand NorthStar Realty Europe Corp. (NYSE:NRE) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks ScanSource, Inc. (NASDAQ:SCSC) is even less popular than NRE. Hedge funds dodged a bullet by taking a bearish stance towards SCSC. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately SCSC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SCSC investors were disappointed as the stock returned -6.2% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.