Did Hedge Funds Make The Right Call On Sterling Bancorp (STL) ?

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 Sterling Bancorp (NYSE:STL) and determine whether the smart money was really smart about this stock.

Is Sterling Bancorp (NYSE:STL) the right investment to pursue these days? The smart money was taking a bearish view. The number of long hedge fund positions dropped by 5 lately. Our calculations also showed that STL 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.

Matthew Lindenbaum Basswood Capital

Matthew Lindenbaum of Basswood Capital

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. Keeping this in mind we’re going to take a gander at the new hedge fund action surrounding Sterling Bancorp (NYSE:STL).

What does smart money think about Sterling Bancorp (NYSE:STL)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 19 hedge funds with a bullish position in STL a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Ric Dillon’s Diamond Hill Capital has the most valuable position in Sterling Bancorp (NYSE:STL), worth close to $74.9 million, accounting for 0.5% of its total 13F portfolio. The second most bullish fund manager is Basswood Capital, managed by Matthew Lindenbaum, which holds a $26.5 million position; the fund has 3.1% of its 13F portfolio invested in the stock. Other peers with similar optimism include Paul Magidson, Jonathan Cohen. And Ostrom Enders’s Castine Capital Management, Mario Gabelli’s GAMCO Investors and Daniel Johnson’s Gillson Capital. In terms of the portfolio weights assigned to each position Castine Capital Management allocated the biggest weight to Sterling Bancorp (NYSE:STL), around 7.85% of its 13F portfolio. Seidman Investment Partnership is also relatively very bullish on the stock, earmarking 3.98 percent of its 13F equity portfolio to STL.

Because Sterling Bancorp (NYSE:STL) has faced a decline in interest from hedge fund managers, it’s easy to see that there was a specific group of fund managers that decided to sell off their positions entirely last quarter. It’s worth mentioning that Michael Kharitonov and Jon David McAuliffe’s Voleon Capital sold off the largest stake of the 750 funds tracked by Insider Monkey, worth about $1.6 million in stock, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors was right behind this move, as the fund dumped about $1.1 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Sterling Bancorp (NYSE:STL). These stocks are Intercept Pharmaceuticals Inc (NASDAQ:ICPT), Brookfield Business Partners L.P. (NYSE:BBU), Integer Holdings Corporation (NYSE:ITGR), and Apple Hospitality REIT Inc (NYSE:APLE). This group of stocks’ market values match STL’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ICPT 19 258760 -8
BBU 2 1459 -2
ITGR 20 88925 0
APLE 11 74704 -4
Average 13 105962 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $106 million. That figure was $176 million in STL’s case. Integer Holdings Corporation (NYSE:ITGR) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Sterling Bancorp (NYSE:STL) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately STL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on STL were disappointed as the stock returned 12.9% during the second quarter 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.