Did Hedge Funds Drop The Ball On The Scotts Miracle-Gro Company (SMG) ?

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards The Scotts Miracle-Gro Company (NYSE:SMG) and see how it was affected.

Is The Scotts Miracle-Gro Company (NYSE:SMG) the right investment to pursue these days? Hedge funds are getting less bullish. The number of bullish hedge fund positions shrunk by 4 recently. Our calculations also showed that smg isn’t among the 30 most popular stocks among hedge funds. SMG was in 16 hedge funds’ portfolios at the end of the first quarter of 2019. There were 20 hedge funds in our database with SMG holdings at the end of the previous quarter.

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 flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

We’re going to view the key hedge fund action surrounding The Scotts Miracle-Gro Company (NYSE:SMG).

Hedge fund activity in The Scotts Miracle-Gro Company (NYSE:SMG)

Heading into the second quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in SMG a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

No of Hedge Funds with SMG Positions

More specifically, Fisher Asset Management was the largest shareholder of The Scotts Miracle-Gro Company (NYSE:SMG), with a stake worth $93.6 million reported as of the end of March. Trailing Fisher Asset Management was Markel Gayner Asset Management, which amassed a stake valued at $23.4 million. Winton Capital Management, Citadel Investment Group, and GAMCO Investors were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as The Scotts Miracle-Gro Company (NYSE:SMG) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there lies a certain “tier” of money managers who were dropping their entire stakes heading into Q3. Interestingly, Jim Simons’s Renaissance Technologies dropped the largest stake of all the hedgies tracked by Insider Monkey, totaling close to $20.1 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund cut about $6.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 4 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as The Scotts Miracle-Gro Company (NYSE:SMG) but similarly valued. These stocks are SLM Corp (NASDAQ:SLM), Choice Hotels International, Inc. (NYSE:CHH), Hospitality Properties Trust (NASDAQ:HPT), and Spark Therapeutics Inc (NASDAQ:ONCE). This group of stocks’ market caps resemble SMG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SLM 29 576434 5
CHH 18 272313 -1
HPT 11 68312 -5
ONCE 36 1167154 21
Average 23.5 521053 5

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $521 million. That figure was $168 million in SMG’s case. Spark Therapeutics Inc (NASDAQ:ONCE) is the most popular stock in this table. On the other hand Hospitality Properties Trust (NASDAQ:HPT) is the least popular one with only 11 bullish hedge fund positions. The Scotts Miracle-Gro Company (NYSE:SMG) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on SMG as the stock returned 26.1% during the same time frame and outperformed the market by an even larger margin.

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