Did Hedge Funds Make The Right Call On BMC Stock Holdings, Inc. (BMCH) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded BMC Stock Holdings, Inc. (NASDAQ:BMCH) and determine whether the smart money was really smart about this stock.

BMC Stock Holdings, Inc. (NASDAQ:BMCH) has seen a decrease in enthusiasm from smart money lately. BMCH was in 23 hedge funds’ portfolios at the end of March. There were 29 hedge funds in our database with BMCH holdings at the end of the previous quarter. Our calculations also showed that BMCH 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

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At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind we’re going to take a glance at the new hedge fund action regarding BMC Stock Holdings, Inc. (NASDAQ:BMCH).

Hedge fund activity in BMC Stock Holdings, Inc. (NASDAQ:BMCH)

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from the fourth quarter of 2019. On the other hand, there were a total of 29 hedge funds with a bullish position in BMCH a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Coliseum Capital, managed by Christopher Shackelton and Adam Gray, holds the most valuable position in BMC Stock Holdings, Inc. (NASDAQ:BMCH). Coliseum Capital has a $86.3 million position in the stock, comprising 23.4% of its 13F portfolio. The second largest stake is held by Royce & Associates, managed by Chuck Royce, which holds a $28 million position; 0.4% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish include Renaissance Technologies, Richard S. Meisenberg’s ACK Asset Management and William C. Martin’s Raging Capital Management. In terms of the portfolio weights assigned to each position Coliseum Capital allocated the biggest weight to BMC Stock Holdings, Inc. (NASDAQ:BMCH), around 23.39% of its 13F portfolio. ACK Asset Management is also relatively very bullish on the stock, dishing out 7.81 percent of its 13F equity portfolio to BMCH.

Due to the fact that BMC Stock Holdings, Inc. (NASDAQ:BMCH) has faced bearish sentiment from hedge fund managers, it’s safe to say that there is a sect of hedge funds that slashed their positions entirely last quarter. It’s worth mentioning that Ken Grossman and Glen Schneider’s SG Capital Management dumped the biggest investment of all the hedgies watched by Insider Monkey, valued at an estimated $20.5 million in stock. Israel Englander’s fund, Millennium Management, also dumped its stock, about $5.9 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 6 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to BMC Stock Holdings, Inc. (NASDAQ:BMCH). These stocks are Magellan Health Inc (NASDAQ:MGLN), Ligand Pharmaceuticals Inc. (NASDAQ:LGND), MicroStrategy Incorporated (NASDAQ:MSTR), and Innoviva, Inc. (NASDAQ:INVA). All of these stocks’ market caps are similar to BMCH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MGLN 15 234535 -4
LGND 27 242071 4
MSTR 18 63901 -7
INVA 19 252057 0
Average 19.75 198141 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $198 million. That figure was $210 million in BMCH’s case. Ligand Pharmaceuticals Inc. (NASDAQ:LGND) is the most popular stock in this table. On the other hand Magellan Health Inc (NASDAQ:MGLN) is the least popular one with only 15 bullish hedge fund positions. BMC Stock Holdings, Inc. (NASDAQ:BMCH) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on BMCH as the stock returned 41.8% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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