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Were Hedge Funds Right About Selling SelectQuote, Inc. (SLQT)?

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Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of SelectQuote, Inc. (NYSE:SLQT).

Is SelectQuote, Inc. (NYSE:SLQT) the right investment to pursue these days? Hedge funds were becoming less confident. The number of bullish hedge fund positions were trimmed by 2 lately. SelectQuote, Inc. (NYSE:SLQT) was in 17 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 29. Our calculations also showed that SLQT isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 19 hedge funds in our database with SLQT positions at the end of the fourth quarter.

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 115 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.

Noam Gottesman GLG Partners
Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. With all of this in mind we're going to take a glance at the recent hedge fund action surrounding SelectQuote, Inc. (NYSE:SLQT).

Do Hedge Funds Think SLQT Is A Good Stock To Buy Now?

At Q1's end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. On the other hand, there were a total of 0 hedge funds with a bullish position in SLQT a year ago. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

The largest stake in SelectQuote, Inc. (NYSE:SLQT) was held by Redmile Group, which reported holding $59.2 million worth of stock at the end of December. It was followed by Park West Asset Management with a $27.9 million position. Other investors bullish on the company included Ararat Capital, Citadel Investment Group, and Millennium Management. In terms of the portfolio weights assigned to each position Ararat Capital allocated the biggest weight to SelectQuote, Inc. (NYSE:SLQT), around 10.7% of its 13F portfolio. Birch Grove Capital is also relatively very bullish on the stock, designating 1.64 percent of its 13F equity portfolio to SLQT.

Seeing as SelectQuote, Inc. (NYSE:SLQT) has experienced declining sentiment from the smart money, we can see that there lies a certain "tier" of hedge funds who were dropping their positions entirely heading into Q2. Intriguingly, George Soros's Soros Fund Management dropped the biggest stake of all the hedgies watched by Insider Monkey, comprising an estimated $115.3 million in stock, and Sean Murphy's Game Creek Capital was right behind this move, as the fund dumped about $2.1 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 2 funds heading into Q2.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as SelectQuote, Inc. (NYSE:SLQT) but similarly valued. We will take a look at Magnite Inc. (NASDAQ:MGNI), Allegro MicroSystems, Inc. (NASDAQ:ALGM), FTI Consulting, Inc. (NYSE:FCN), Stantec Inc. (NYSE:STN), Fisker Inc. (NYSE:FSR), Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI), and Marathon Digital Holdings, Inc. (NASDAQ:MARA). This group of stocks' market caps are similar to SLQT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGNI,25,335746,-4 ALGM,17,90381,1 FCN,24,520173,-1 STN,9,39824,2 FSR,22,337954,4 SHI,4,14885,-1 MARA,10,197814,2 Average,15.9,219540,0.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.9 hedge funds with bullish positions and the average amount invested in these stocks was $220 million. That figure was $185 million in SLQT's case. Magnite Inc. (NASDAQ:MGNI) is the most popular stock in this table. On the other hand Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) is the least popular one with only 4 bullish hedge fund positions. SelectQuote, Inc. (NYSE:SLQT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SLQT is 51.5. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and beat the market again by 10.1 percentage points. Unfortunately SLQT wasn't nearly as popular as these 5 stocks and hedge funds that were betting on SLQT were disappointed as the stock returned -40.7% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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