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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether SmileDirectClub, Inc. (NASDAQ:SDC) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Is SmileDirectClub, Inc. (NASDAQ:SDC) a buy, sell, or hold? Money managers are becoming less hopeful. The number of long hedge fund positions fell by 9 recently. Our calculations also showed that SDC isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 percentage points since March 2017 (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 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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Paul Marshall of Marshall Wace[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's take a gander at the key hedge fund action surrounding SmileDirectClub, Inc. (NASDAQ:SDC).
How are hedge funds trading SmileDirectClub, Inc. (NASDAQ:SDC)?
Heading into the first quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SDC over the last 18 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 Insider Monkey's hedge fund database, Bruce Emery's Greenvale Capital has the largest position in SmileDirectClub, Inc. (NASDAQ:SDC), worth close to $27.5 million, corresponding to 6.8% of its total 13F portfolio. On Greenvale Capital's heels is Hillhouse Capital Management, led by Lei Zhang, holding a $25.3 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism contain Paul Marshall and Ian Wace's Marshall Wace LLP, Ken Griffin's Citadel Investment Group and Anand Parekh's Alyeska Investment Group. In terms of the portfolio weights assigned to each position Greenvale Capital allocated the biggest weight to SmileDirectClub, Inc. (NASDAQ:SDC), around 6.79% of its 13F portfolio. Kamunting Street Capital is also relatively very bullish on the stock, setting aside 2.54 percent of its 13F equity portfolio to SDC.
Due to the fact that SmileDirectClub, Inc. (NASDAQ:SDC) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there were a few money managers that slashed their entire stakes in the third quarter. Intriguingly, Israel Englander's Millennium Management cut the biggest position of all the hedgies watched by Insider Monkey, worth close to $34.9 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also dumped its stock, about $20.6 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 9 funds in the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as SmileDirectClub, Inc. (NASDAQ:SDC) but similarly valued. These stocks are Cloudera, Inc. (NYSE:CLDR), Hutchison China MediTech Limited (NASDAQ:HCM), Boyd Gaming Corporation (NYSE:BYD), and Itron, Inc. (NASDAQ:ITRI). All of these stocks' market caps are closest to SDC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CLDR,22,809760,-5 HCM,7,20419,-5 BYD,30,216098,3 ITRI,21,456240,-4 Average,20,375629,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $376 million. That figure was $140 million in SDC's case. Boyd Gaming Corporation (NYSE:BYD) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 7 bullish hedge fund positions. SmileDirectClub, Inc. (NASDAQ:SDC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately SDC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SDC investors were disappointed as the stock returned -51% during the same time period 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 most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.