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Were These Hedge Funds Right About Science Applications International Corp (SAIC)?

Abigail Fisher
·7 min read

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Science Applications International Corp (NYSE:SAIC).

Science Applications International Corp (NYSE:SAIC) was in 35 hedge funds' portfolios at the end of June. The all time high for this statistics is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. SAIC has seen an increase in support from the world's most elite money managers in recent months. There were 34 hedge funds in our database with SAIC positions at the end of the first quarter. Our calculations also showed that SAIC isn't among the 30 most popular stocks among hedge funds (click for Q2 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.

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 S&P 500 ETFs by 58 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 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.

Arnaud Ajdler Engine Capital
Arnaud Ajdler Engine Capital

Arnaud Ajdler of Engine Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest telecom companies to identify fast growing companies in various industries. 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 to get excerpts of these letters in your inbox. With all of this in mind we're going to take a look at the latest hedge fund action surrounding Science Applications International Corp (NYSE:SAIC).

What does smart money think about Science Applications International Corp (NYSE:SAIC)?

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in SAIC a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Adage Capital Management held the most valuable stake in Science Applications International Corp (NYSE:SAIC), which was worth $71.2 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $67.5 million worth of shares. Simcoe Capital Management, Balyasny Asset Management, and Sunriver 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 Simcoe Capital Management allocated the biggest weight to Science Applications International Corp (NYSE:SAIC), around 14.25% of its 13F portfolio. Sunriver Management is also relatively very bullish on the stock, dishing out 6.24 percent of its 13F equity portfolio to SAIC.

As one would reasonably expect, key hedge funds were leading the bulls' herd. Paloma Partners, managed by Donald Sussman, created the biggest position in Science Applications International Corp (NYSE:SAIC). Paloma Partners had $7.5 million invested in the company at the end of the quarter. Arnaud Ajdler's Engine Capital also made a $5.3 million investment in the stock during the quarter. The following funds were also among the new SAIC investors: Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, Paul Tudor Jones's Tudor Investment Corp, and Jinghua Yan's TwinBeech Capital.

Let's also examine hedge fund activity in other stocks similar to Science Applications International Corp (NYSE:SAIC). We will take a look at Haemonetics Corporation (NYSE:HAE), MyoKardia, Inc. (NASDAQ:MYOK), TCF Financial Corporation (NASDAQ:TCF), Western Midstream Partners, LP (NYSE:WES), Life Storage, Inc. (NYSE:LSI), The Descartes Systems Group Inc (NASDAQ:DSGX), and Vertiv Holdings Co (NYSE:VRT). This group of stocks' market values match SAIC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HAE,39,533278,5 MYOK,45,1360886,12 TCF,14,85082,-5 WES,11,79571,-1 LSI,19,137533,-3 DSGX,10,196345,0 VRT,40,747088,1 Average,25.4,448540,1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.4 hedge funds with bullish positions and the average amount invested in these stocks was $449 million. That figure was $449 million in SAIC's case. MyoKardia, Inc. (NASDAQ:MYOK) is the most popular stock in this table. On the other hand The Descartes Systems Group Inc (NASDAQ:DSGX) is the least popular one with only 10 bullish hedge fund positions. Science Applications International Corp (NYSE:SAIC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SAIC is 71.7. 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. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately SAIC wasn't nearly as popular as these 10 stocks and hedge funds that were betting on SAIC were disappointed as the stock returned -0.7% since the end of June (through 10/30) 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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