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Stepan Company (SCL): Are Hedge Funds Right About This Stock?

Abigail Fisher

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Stepan Company (NYSE:SCL) and determine whether the smart money was really smart about this stock.

Stepan Company (NYSE:SCL) has experienced a decrease in enthusiasm from smart money in recent months. SCL was in 10 hedge funds' portfolios at the end of the first quarter of 2020. There were 13 hedge funds in our database with SCL holdings at the end of the previous quarter. Our calculations also showed that SCL isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_224708" align="aligncenter" width="389"] New York Stock Exchange[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we're going to check out the new hedge fund action regarding Stepan Company (NYSE:SCL).

What does smart money think about Stepan Company (NYSE:SCL)?

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the previous quarter. On the other hand, there were a total of 16 hedge funds with a bullish position in SCL a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Stepan Company (NYSE:SCL), which was worth $32.8 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $5 million worth of shares. AQR Capital Management, Two Sigma Advisors, and Winton Capital Management 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 Winton Capital Management allocated the biggest weight to Stepan Company (NYSE:SCL), around 0.05% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to SCL.

Because Stepan Company (NYSE:SCL) has experienced falling interest from the smart money, logic holds that there were a few fund managers who were dropping their positions entirely heading into Q4. Intriguingly, Israel Englander's Millennium Management said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, comprising about $2.4 million in stock, and Hoon Kim's Quantinno Capital was right behind this move, as the fund said goodbye to about $0.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 3 funds heading into Q4.

Let's now take a look at hedge fund activity in other stocks similar to Stepan Company (NYSE:SCL). We will take a look at BancorpSouth Bank (NYSE:BXS), Investors Bancorp, Inc. (NASDAQ:ISBC), Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN), and Cronos Group Inc. (NASDAQ:CRON). This group of stocks' market values are closest to SCL's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BXS,15,36662,1 ISBC,26,136450,-4 BHVN,29,390989,-6 CRON,10,73477,0 Average,20,159395,-2.25 [/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 $159 million. That figure was $48 million in SCL's case. Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN) is the most popular stock in this table. On the other hand Cronos Group Inc. (NASDAQ:CRON) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Stepan Company (NYSE:SCL) is even less popular than CRON. Hedge funds dodged a bullet by taking a bearish stance towards SCL. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately SCL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); SCL investors were disappointed as the stock returned 10.1% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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

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