Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Stellus Capital Investment Corporation (NYSE:SCM) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 4 hedge funds' portfolios at the end of the third quarter of 2019. 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 The Joint Corp. (NASDAQ:JYNT), Radiant Logistics, Inc. (NYSE:RLGT), and Adesto Technologies Corporation (NASDAQ:IOTS) to gather more data points. Our calculations also showed that SCM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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' 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_673876" align="aligncenter" width="473"] John Overdeck of Two Sigma Advisors[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's check out the new hedge fund action regarding Stellus Capital Investment Corporation (NYSE:SCM).
What have hedge funds been doing with Stellus Capital Investment Corporation (NYSE:SCM)?
At the end of the third quarter, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in SCM over the last 17 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the most valuable position in Stellus Capital Investment Corporation (NYSE:SCM). Arrowstreet Capital has a $4.9 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is Two Sigma Advisors, led by John Overdeck and David Siegel, holding a $0.6 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions include Ken Griffin's Citadel Investment Group, Peter Algert and Kevin Coldiron's Algert Coldiron Investors and . In terms of the portfolio weights assigned to each position Algert Coldiron Investors allocated the biggest weight to Stellus Capital Investment Corporation (NYSE:SCM), around 0.07% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to SCM.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Citadel Investment Group).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Stellus Capital Investment Corporation (NYSE:SCM) but similarly valued. These stocks are The Joint Corp. (NASDAQ:JYNT), Radiant Logistics, Inc. (NYSE:RLGT), Adesto Technologies Corporation (NASDAQ:IOTS), and Amplify Energy Corp. (NYSE:AMPY). All of these stocks' market caps are closest to SCM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JYNT,12,57003,2 RLGT,14,11751,2 IOTS,14,54092,6 AMPY,22,113577,22 Average,15.5,59106,8 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $6 million in SCM's case. Amplify Energy Corp. (NYSE:AMPY) is the most popular stock in this table. On the other hand The Joint Corp. (NASDAQ:JYNT) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Stellus Capital Investment Corporation (NYSE:SCM) is even less popular than JYNT. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on SCM, though not to the same extent, as the stock returned 7.1% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.