Schnitzer Steel Industries, Inc. (NASDAQ:SCHN)’s stock advanced by 13% on Wednesday on an unusually high volume. Yesterday the stock closed down 9.34% at $17.47 per share as it reported a loss of $9.6 million, or $0.36 per share, down from a profit of $3.1 million, or $0.12 per share, in the same quarter of the previous year. The main reason for today’s appreciation seems to be the rating update from Bank of America, which upgraded the stock to ‘Buy’ from ‘Neutral’ and raised the price target to $21.00 from $17.00. Another argument in support of Schnitzer Steel Industries is the bullish sentiment of hedge funds, observed in the last round of 13F filings. The company was in 18 hedge funds’ equity portfolios at the end of the first quarter of 2015, up from 15 funds a quarter earlier.
We follow hedge funds since our research has shown that their stock picks historically managed to generate alpha even though the filings are delayed by up to 45 days. We used a 60-day delay in our back tests to be on the safe side and our research showed that the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Total Return Index by an average of 95 basis points per month between 1999 and 2012. After adjusting for risk, our calculations revealed that these stocks’ monthly alpha was 80 basis points. We have also been sharing and tracking the performance of these stocks since the end of August 2012, during which time they have returned 144%, outperforming the S&P 500 ETF by nearly 85 percentage points (see more details here).
We also follow insider transactions as a gauge of insider sentiment on companies. This can tell us whether a firm’s management team is confident or not in their own company’s shares. In the case of Schnitzer Steel Industries, Inc., Director Wayland Hicks purchased 1,000 shares on January 20 while General Counsel Richard Josephson sold 550 shares on April 30. Taking all of these into consideration, let us review hedge fund activity regarding Schnitzer Steel Industries on the following page.
What have hedge funds been doing with Schnitzer Steel Industries, Inc. (NASDAQ:SCHN)?
By March 31, a total of 18 of the hedge funds tracked by Insider Monkey were long in this stock, a change of 20% from the fourth quarter. The aggregate value of their investments, however, dropped significantly to $78.62 million by the end of March from $134.86 million the prior quarter.
Among hedge funds followed by Insider Monkey, Peter Schliemann‘s Rutabaga Capital Management had the most valuable position in Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) with 1.50 million shares shares worth close to $23.8 million, accounting for 2.4% of its total 13F portfolio. Coming in second is Pzena Investment Management, managed by Richard S. Pzena, which held 1.05 million shares share. Other members of the smart money with long positions are Chuck Royce’s Royce & Associates, Jim Simons’s Renaissance Technologies and J. Carlo Cannell’s Cannell Capital.
Consequently, a number of investors initiated substantial long positions. D.E. Shaw & Co., L.P., managed by David. E. Shaw, established the most outsized position in Schnitzer Steel Industries, Inc. (NASDAQ:SCHN), which contains 133,060 shares. Peter Muller’s PDT Partners also disclosed a new stake consisting of 69,080 shares. Some other funds with brand new SCHN positions are John Thiessen’s Vertex One Asset Management, John Overdeck and David Siegel’s Two Sigma Advisors, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.
Because of the sizeable decline in the aggregate value of hedge fund holdings’, even though more hedge funds held long positions by the end of the first quarter, and given the firm’s disappointing performance for the previous quarter, we conclude that Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) may not be the best stock to buy at the moment.
Disclosure: None
