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Is SCS A Good Stock To Buy Now According To Hedge Funds?

Asma UL Husna
·6 min read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Steelcase Inc. (NYSE:SCS).

Is SCS a good stock to buy now? Hedge fund interest in Steelcase Inc. (NYSE:SCS) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that SCS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as NuStar Energy L.P. (NYSE:NS), ICF International Inc (NASDAQ:ICFI), and EnPro Industries, Inc. (NYSE:NPO) to gather more data points. Video: Watch our video about the top 5 most popular hedge fund stocks.

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 66 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 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Overdeck of Two Sigma
John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now we're going to take a look at the new hedge fund action regarding Steelcase Inc. (NYSE:SCS).

Do Hedge Funds Think SCS Is A Good Stock To Buy Now?

At Q3's end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SCS over the last 21 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Pzena Investment Management was the largest shareholder of Steelcase Inc. (NYSE:SCS), with a stake worth $37.7 million reported as of the end of September. Trailing Pzena Investment Management was Renaissance Technologies, which amassed a stake valued at $16.1 million. Arrowstreet Capital, Two Sigma Advisors, and D E Shaw 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 Quantinno Capital allocated the biggest weight to Steelcase Inc. (NYSE:SCS), around 0.29% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, setting aside 0.24 percent of its 13F equity portfolio to SCS.

Because Steelcase Inc. (NYSE:SCS) has experienced a decline in interest from hedge fund managers, it's easy to see that there is a sect of hedge funds that decided to sell off their positions entirely in the third quarter. At the top of the heap, Phill Gross and Robert Atchinson's Adage Capital Management sold off the biggest investment of the "upper crust" of funds monitored by Insider Monkey, totaling an estimated $6.3 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dumped its stock, about $1.4 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over hedge fund activity in other stocks similar to Steelcase Inc. (NYSE:SCS). We will take a look at NuStar Energy L.P. (NYSE:NS), ICF International Inc (NASDAQ:ICFI), EnPro Industries, Inc. (NYSE:NPO), BEST Inc. (NYSE:BEST), Herc Holdings Inc. (NYSE:HRI), Infinera Corp. (NASDAQ:INFN), and Annexon, Inc. (NASDAQ:ANNX). All of these stocks' market caps are similar to SCS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NS,4,8446,-1 ICFI,12,32049,1 NPO,18,144888,1 BEST,8,13537,2 HRI,19,440444,-2 INFN,20,261249,-1 ANNX,11,323562,11 Average,13.1,174882,1.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.1 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $93 million in SCS's case. Infinera Corp. (NASDAQ:INFN) is the most popular stock in this table. On the other hand NuStar Energy L.P. (NYSE:NS) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Steelcase Inc. (NYSE:SCS) is more popular among hedge funds. Our overall hedge fund sentiment score for SCS is 77. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks returned 30.7% in 2020 through December 14th but still managed to beat the market by 15.8 percentage points. Hedge funds were also right about betting on SCS as the stock returned 28.3% since the end of September (through 12/14) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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Disclosure: None. This article was originally published at Insider Monkey.

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