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Did Hedge Funds Make The Right Call On SunCoke Energy, Inc (SXC) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding SunCoke Energy, Inc (NYSE:SXC) and determine whether hedge funds had an edge regarding this stock.

SunCoke Energy, Inc (NYSE:SXC) shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. SXC was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. There were 20 hedge funds in our database with SXC holdings at the end of the previous quarter. Our calculations also showed that SXC 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.

GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

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. Keeping this in mind we’re going to review the key hedge fund action encompassing SunCoke Energy, Inc (NYSE:SXC).

What have hedge funds been doing with SunCoke Energy, Inc (NYSE:SXC)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SXC over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Is SXC A Good Stock To Buy?

Among these funds, Mangrove Partners held the most valuable stake in SunCoke Energy, Inc (NYSE:SXC), which was worth $22.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $20.2 million worth of shares. Nokomis Capital, Contrarius Investment Management, and Tontine Asset 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 Nokomis Capital allocated the biggest weight to SunCoke Energy, Inc (NYSE:SXC), around 4.4% of its 13F portfolio. Mangrove Partners is also relatively very bullish on the stock, earmarking 3.08 percent of its 13F equity portfolio to SXC.

Because SunCoke Energy, Inc (NYSE:SXC) has faced falling interest from the smart money, logic holds that there lies a certain “tier” of money managers that elected to cut their full holdings last quarter. Intriguingly, Mike Vranos’s Ellington dumped the biggest investment of the 750 funds tracked by Insider Monkey, totaling close to $0.5 million in stock. Hoon Kim’s fund, Quantinno Capital, also said goodbye to its stock, about $0.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as SunCoke Energy, Inc (NYSE:SXC) but similarly valued. These stocks are Juniper Industrial Holdings, Inc. (NYSE:JIH), BeyondSpring, Inc. (NASDAQ:BYSI), Mitek Systems, Inc. (NASDAQ:MITK), and Surgery Partners, Inc. (NASDAQ:SGRY). This group of stocks’ market valuations resemble SXC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JIH 17 114884 1
BYSI 1 256 0
MITK 17 62636 -2
SGRY 10 30221 -1
Average 11.25 51999 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $67 million in SXC’s case. Juniper Industrial Holdings, Inc. (NYSE:JIH) is the most popular stock in this table. On the other hand BeyondSpring, Inc. (NASDAQ:BYSI) is the least popular one with only 1 bullish hedge fund positions. SunCoke Energy, Inc (NYSE:SXC) 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately SXC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SXC were disappointed as the stock returned -12.8% 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.