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Did Hedge Funds Make The Right Call On Service Corporation International (SCI) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Service Corporation International (NYSE:SCI) and determine whether hedge funds skillfully traded this stock.

Is Service Corporation International (NYSE:SCI) worth your attention right now? Money managers were taking an optimistic view. The number of bullish hedge fund bets went up by 12 lately. Our calculations also showed that SCI 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.

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.

GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. Keeping this in mind let’s take a glance at the new hedge fund action surrounding Service Corporation International (NYSE:SCI).

What have hedge funds been doing with Service Corporation International (NYSE:SCI)?

At the end of the first quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 67% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in SCI over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SCI A Good Stock To Buy?

More specifically, Select Equity Group was the largest shareholder of Service Corporation International (NYSE:SCI), with a stake worth $318.5 million reported as of the end of September. Trailing Select Equity Group was Millennium Management, which amassed a stake valued at $21.5 million. Two Sigma Advisors, Clough Capital Partners, and Winton Capital 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 Select Equity Group allocated the biggest weight to Service Corporation International (NYSE:SCI), around 2.2% of its 13F portfolio. Clough Capital Partners is also relatively very bullish on the stock, designating 0.53 percent of its 13F equity portfolio to SCI.

Consequently, some big names have been driving this bullishness. Renaissance Technologies, initiated the most outsized position in Service Corporation International (NYSE:SCI). Renaissance Technologies had $3.2 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also made a $2.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Ken Griffin’s Citadel Investment Group, Michael Gelband’s ExodusPoint Capital, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Service Corporation International (NYSE:SCI) but similarly valued. We will take a look at PTC Inc (NASDAQ:PTC), Algonquin Power & Utilities Corp. (NYSE:AQN), Lennox International Inc. (NYSE:LII), and Arconic Corporation (NYSE:ARNC). This group of stocks’ market caps match SCI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PTC 35 1181835 0
AQN 14 253831 1
LII 21 169377 -11
ARNC 25 1740220 -18
Average 23.75 836316 -7

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $836 million. That figure was $398 million in SCI’s case. PTC Inc (NASDAQ:PTC) is the most popular stock in this table. On the other hand Algonquin Power & Utilities Corp. (NYSE:AQN) is the least popular one with only 14 bullish hedge fund positions. Service Corporation International (NYSE:SCI) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately SCI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SCI were disappointed as the stock returned -0.1% during the same time period 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.