Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first half of 2019. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Science Applications International Corporation (NYSE:SAIC) to find out whether it was one of their high conviction long-term ideas.
Is Science Applications International Corporation (NYSE:SAIC) a buy here? Prominent investors are getting less optimistic. The number of long hedge fund positions decreased by 2 in recent months. Our calculations also showed that SAIC isn't among the 30 most popular stocks among hedge funds.
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 some fund managers who are betting on Dow reaching 40000 in a year, 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 analyze the latest hedge fund action regarding Science Applications International Corporation (NYSE:SAIC).
What does smart money think about Science Applications International Corporation (NYSE:SAIC)?
At the end of the second quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in SAIC a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Citadel Investment Group held the most valuable stake in Science Applications International Corporation (NYSE:SAIC), which was worth $56.4 million at the end of the second quarter. On the second spot was Point72 Asset Management which amassed $51.3 million worth of shares. Moreover, Horizon Asset Management, Adage Capital Management, and Carlson Capital were also bullish on Science Applications International Corporation (NYSE:SAIC), allocating a large percentage of their portfolios to this stock.
Since Science Applications International Corporation (NYSE:SAIC) has faced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there exists a select few fund managers who were dropping their entire stakes heading into Q3. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the largest position of the "upper crust" of funds tracked by Insider Monkey, worth about $5.9 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund dumped about $4.9 million worth. These moves are interesting, as total hedge fund interest was cut by 2 funds heading into Q3.
Let's also examine hedge fund activity in other stocks similar to Science Applications International Corporation (NYSE:SAIC). These stocks are CVR Energy, Inc. (NYSE:CVI), Skechers USA Inc (NYSE:SKX), Axis Capital Holdings Limited (NYSE:AXS), and The Hanover Insurance Group, Inc. (NYSE:THG). All of these stocks' market caps match SAIC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVI,19,3712499,-3 SKX,23,369669,-1 AXS,27,822381,-4 THG,20,254847,-3 Average,22.25,1289849,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $1290 million. That figure was $431 million in SAIC's case. Axis Capital Holdings Limited (NYSE:AXS) is the most popular stock in this table. On the other hand CVR Energy, Inc. (NYSE:CVI) is the least popular one with only 19 bullish hedge fund positions. Science Applications International Corporation (NYSE:SAIC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately SAIC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SAIC were disappointed as the stock returned 1.3% 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 (view the video below) among hedge funds as many of these stocks already outperformed the market so far this year. 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.