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Were Hedge Funds Right About Ditching Select Medical Holdings Corporation (SEM)?

Asma UL Husna

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Select Medical Holdings Corporation (NYSE:SEM) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Select Medical Holdings Corporation (NYSE:SEM) has seen a decrease in enthusiasm from smart money of late. SEM was in 18 hedge funds' portfolios at the end of the first quarter of 2020. There were 21 hedge funds in our database with SEM positions at the end of the previous quarter. Our calculations also showed that SEM 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.

James Flynn Deerfield Management
James Flynn Deerfield Management

James E. Flynn of Deerfield Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's analyze the latest hedge fund action encompassing Select Medical Holdings Corporation (NYSE:SEM).

What does smart money think about Select Medical Holdings Corporation (NYSE:SEM)?

At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SEM over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of Select Medical Holdings Corporation (NYSE:SEM), with a stake worth $19.1 million reported as of the end of September. Trailing Renaissance Technologies was Deerfield Management, which amassed a stake valued at $15.9 million. Point72 Asset Management, Arrowstreet Capital, and PAR 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 Sivik Global Healthcare allocated the biggest weight to Select Medical Holdings Corporation (NYSE:SEM), around 1.64% of its 13F portfolio. Deerfield Management is also relatively very bullish on the stock, designating 0.51 percent of its 13F equity portfolio to SEM.

Due to the fact that Select Medical Holdings Corporation (NYSE:SEM) has faced bearish sentiment from hedge fund managers, we can see that there were a few fund managers that elected to cut their positions entirely last quarter. Interestingly, Israel Englander's Millennium Management said goodbye to the largest position of the 750 funds followed by Insider Monkey, worth close to $11 million in stock. Michael Kharitonov and Jon David McAuliffe's fund, Voleon Capital, also sold off its stock, about $1.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds last quarter.

Let's check out hedge fund activity in other stocks similar to Select Medical Holdings Corporation (NYSE:SEM). We will take a look at TC Pipelines, LP (NYSE:TCP), Associated Banc Corp (NYSE:ASB), Paramount Group Inc (NYSE:PGRE), and The Ensign Group, Inc. (NASDAQ:ENSG). This group of stocks' market values are closest to SEM's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TCP,2,9665,-1 ASB,16,124559,-8 PGRE,19,154841,-1 ENSG,18,88885,3 Average,13.75,94488,-1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $94 million. That figure was $107 million in SEM's case. Paramount Group Inc (NYSE:PGRE) is the most popular stock in this table. On the other hand TC Pipelines, LP (NYSE:TCP) is the least popular one with only 2 bullish hedge fund positions. Select Medical Holdings Corporation (NYSE:SEM) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately SEM wasn't nearly as popular as these 10 stocks and hedge funds that were betting on SEM were disappointed as the stock returned 11.1% during the same time period 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 many of these stocks already outperformed the market so far this year.

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

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