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Did Hedge Funds Make The Right Call On SMART Global Holdings, Inc. (SGH) ?

The latest 13F reporting period has come and gone, and 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. Now, 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 you are going to find out whether hedge funds thoughtSMART Global Holdings, Inc. (NASDAQ:SGH) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

SMART Global Holdings, Inc. (NASDAQ:SGH) was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. SGH investors should be aware of a decrease in enthusiasm from smart money recently. There were 18 hedge funds in our database with SGH positions at the end of the previous quarter. Our calculations also showed that SGH 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to check out the key hedge fund action surrounding SMART Global Holdings, Inc. (NASDAQ:SGH).

What does smart money think about SMART Global Holdings, Inc. (NASDAQ:SGH)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SGH over the last 18 quarters. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Jim Davidson, Dave Roux and Glenn Hutchins’s Silver Lake Partners has the largest position in SMART Global Holdings, Inc. (NASDAQ:SGH), worth close to $224.9 million, accounting for 6.7% of its total 13F portfolio. Coming in second is Crosslink Capital, managed by Seymour Sy Kaufman and Michael Stark, which holds a $14 million position; the fund has 4% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Cliff Asness’s AQR Capital Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Silver Lake Partners allocated the biggest weight to SMART Global Holdings, Inc. (NASDAQ:SGH), around 6.67% of its 13F portfolio. Crosslink Capital is also relatively very bullish on the stock, designating 4.04 percent of its 13F equity portfolio to SGH.

Because SMART Global Holdings, Inc. (NASDAQ:SGH) has experienced falling interest from the smart money, logic holds that there is a sect of fund managers that decided to sell off their entire stakes by the end of the first quarter. At the top of the heap, Richard Driehaus’s Driehaus Capital dropped the biggest investment of all the hedgies watched by Insider Monkey, worth close to $16.2 million in stock, and Renaissance Technologies was right behind this move, as the fund sold off about $3.5 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks similar to SMART Global Holdings, Inc. (NASDAQ:SGH). These stocks are Linx S.A. (NYSE:LINX), Range Resources Corp. (NYSE:RRC), Revlon Inc (NYSE:REV), and Kforce Inc. (NASDAQ:KFRC). All of these stocks’ market caps match SGH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LINX 5 11501 1
RRC 23 154075 -6
REV 36 178239 -2
KFRC 15 46137 -7
Average 19.75 97488 -3.5

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 $97 million. That figure was $264 million in SGH’s case. Revlon Inc (NYSE:REV) is the most popular stock in this table. On the other hand Linx S.A. (NYSE:LINX) is the least popular one with only 5 bullish hedge fund positions. SMART Global Holdings, Inc. (NASDAQ:SGH) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately SGH wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SGH investors were disappointed as the stock returned 15.1% since Q1 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 most of these stocks already outperformed the market in 2020.

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