Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in SecureWorks Corp. (NASDAQ:SCWX)? The smart money sentiment can provide an answer to this question.
SecureWorks Corp. (NASDAQ:SCWX) was in 9 hedge funds' portfolios at the end of June. SCWX shareholders have witnessed a decrease in activity from the world's largest hedge funds of late. There were 12 hedge funds in our database with SCWX positions at the end of the previous quarter. Our calculations also showed that SCWX 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. Let's go over the recent hedge fund action encompassing SecureWorks Corp. (NASDAQ:SCWX).
What have hedge funds been doing with SecureWorks Corp. (NASDAQ:SCWX)?
At the end of the second quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. By comparison, 6 hedge funds held shares or bullish call options in SCWX a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of SecureWorks Corp. (NASDAQ:SCWX), with a stake worth $7.8 million reported as of the end of March. Trailing Royce & Associates was Masters Capital Management, which amassed a stake valued at $6.6 million. Two Sigma Advisors, AQR Capital Management, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that SecureWorks Corp. (NASDAQ:SCWX) has faced bearish sentiment from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of hedge funds who sold off their entire stakes heading into Q3. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the biggest stake of the "upper crust" of funds followed by Insider Monkey, totaling about $1.5 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund cut about $0.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 3 funds heading into Q3.
Let's go over hedge fund activity in other stocks similar to SecureWorks Corp. (NASDAQ:SCWX). These stocks are Kraton Corporation (NYSE:KRA), Oil States International, Inc. (NYSE:OIS), Revlon Inc (NYSE:REV), and Target Hospitality Corp. (NASDAQ:TH). This group of stocks' market values resemble SCWX's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KRA,17,83773,-2 OIS,9,35062,-5 REV,31,307405,3 TH,17,88582,0 Average,18.5,128706,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $129 million. That figure was $20 million in SCWX's case. Revlon Inc (NYSE:REV) is the most popular stock in this table. On the other hand Oil States International, Inc. (NYSE:OIS) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks SecureWorks Corp. (NASDAQ:SCWX) is even less popular than OIS. Hedge funds dodged a bullet by taking a bearish stance towards SCWX. 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 SCWX wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SCWX investors were disappointed as the stock returned -2.7% 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.