Did Hedge Funds Make The Right Call On SmileDirectClub, Inc. (SDC) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards SmileDirectClub, Inc. (NASDAQ:SDC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

SmileDirectClub, Inc. (NASDAQ:SDC) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Dorman Products Inc. (NASDAQ:DORM), ExlService Holdings, Inc. (NASDAQ:EXLS), and Progyny, Inc. (NASDAQ:PGNY) to gather more data points. Our calculations also showed that SDC 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andreas Halvorsen

Andreas Halvorsen of Viking Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We go through lists like the 10 most profitable companies in the world 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. Keeping this in mind let’s analyze the recent hedge fund action surrounding SmileDirectClub, Inc. (NASDAQ:SDC).

What does smart money think about SmileDirectClub, Inc. (NASDAQ:SDC)?

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SDC 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.

More specifically, Hillhouse Capital Management was the largest shareholder of SmileDirectClub, Inc. (NASDAQ:SDC), with a stake worth $13.5 million reported as of the end of September. Trailing Hillhouse Capital Management was Viking Global, which amassed a stake valued at $10.7 million. Miller Value Partners, Melvin Capital Management, and Coatue 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 Kamunting Street Capital allocated the biggest weight to SmileDirectClub, Inc. (NASDAQ:SDC), around 1.11% of its 13F portfolio. Miller Value Partners is also relatively very bullish on the stock, designating 0.6 percent of its 13F equity portfolio to SDC.

Judging by the fact that SmileDirectClub, Inc. (NASDAQ:SDC) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few money managers that elected to cut their positions entirely last quarter. At the top of the heap, Bruce Emery’s Greenvale Capital sold off the largest stake of all the hedgies watched by Insider Monkey, valued at close to $27.5 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dropped its stock, about $19.4 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to SmileDirectClub, Inc. (NASDAQ:SDC). We will take a look at Dorman Products Inc. (NASDAQ:DORM), ExlService Holdings, Inc. (NASDAQ:EXLS), Progyny, Inc. (NASDAQ:PGNY), and Otter Tail Corporation (NASDAQ:OTTR). This group of stocks’ market values are closest to SDC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DORM 14 40202 1
EXLS 15 46684 -3
PGNY 10 13623 2
OTTR 12 68853 1
Average 12.75 42341 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $66 million in SDC’s case. ExlService Holdings, Inc. (NASDAQ:EXLS) is the most popular stock in this table. On the other hand Progyny, Inc. (NASDAQ:PGNY) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks SmileDirectClub, Inc. (NASDAQ:SDC) is more popular among hedge funds. 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on SDC as the stock returned 88.9% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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