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Is Sensient Technologies Corporation (SXT) Going to Burn These Hedge Funds?

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Reymerlyn Martin
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The elite funds run by legendary investors such as David Tepper and Dan Loeb make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don't follow. Because of their pay structures, they have strong incentives to do the research necessary to beat the market. That's why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Sensient Technologies Corporation (NYSE:SXT) from the perspective of those elite funds.

Is Sensient Technologies Corporation (NYSE:SXT) undervalued? The best stock pickers are buying. The number of bullish hedge fund bets inched up by 4 recently. Our calculations also showed that SXT isn't among the 30 most popular stocks among hedge funds (view the video below).

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

Video: Click the image to 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 has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

GOTHAM ASSET MANAGEMENT
GOTHAM ASSET MANAGEMENT

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 take a glance at the new hedge fund action surrounding Sensient Technologies Corporation (NYSE:SXT).

Hedge fund activity in Sensient Technologies Corporation (NYSE:SXT)

Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in SXT over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

SXT_oct2019
SXT_oct2019

More specifically, GAMCO Investors was the largest shareholder of Sensient Technologies Corporation (NYSE:SXT), with a stake worth $43.9 million reported as of the end of March. Trailing GAMCO Investors was Royce & Associates, which amassed a stake valued at $2.3 million. Citadel Investment Group, Holocene Advisors, and Balyasny Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, some big names have jumped into Sensient Technologies Corporation (NYSE:SXT) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the most valuable position in Sensient Technologies Corporation (NYSE:SXT). Balyasny Asset Management had $0.8 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $0.7 million position during the quarter. The following funds were also among the new SXT investors: Joel Greenblatt's Gotham Asset Management, Mike Vranos's Ellington, and Steve Cohen's Point72 Asset Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Sensient Technologies Corporation (NYSE:SXT) but similarly valued. We will take a look at Cleveland-Cliffs Inc (NYSE:CLF), RLJ Lodging Trust (NYSE:RLJ), Liberty Latin America Ltd. (NASDAQ:LILAK), and Brookfield Business Partners L.P. (NYSE:BBU). This group of stocks' market values are closest to SXT's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CLF,28,539781,-7 RLJ,21,179723,0 LILAK,22,396567,4 BBU,5,12411,0 Average,19,282121,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $282 million. That figure was $52 million in SXT's case. Cleveland-Cliffs Inc (NYSE:CLF) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 5 bullish hedge fund positions. Sensient Technologies Corporation (NYSE:SXT) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately SXT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SXT investors were disappointed as the stock returned -6.1% 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.

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