Hedge Fund Consensus Stocks vs. Scientific Games Corp (SGMS) In 2019

Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Scientific Games Corp (NASDAQ:SGMS).

Scientific Games Corp (NASDAQ:SGMS) has experienced a decrease in support from the world’s most elite money managers recently. Our calculations also showed that SGMS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

In the 21st century investor’s toolkit there are numerous metrics stock market investors put to use to appraise their stock investments. A couple of the most useful metrics are hedge fund and insider trading sentiment. We have shown that, historically, those who follow the top picks of the best investment managers can beat the market by a significant amount (see the details here).

Mark Cohen Stone House Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now we’re going to take a peek at the recent hedge fund action encompassing Scientific Games Corp (NASDAQ:SGMS).

How are hedge funds trading Scientific Games Corp (NASDAQ:SGMS)?

At Q3’s end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SGMS over the last 17 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is SGMS A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Fine Capital Partners, managed by Debra Fine, holds the most valuable position in Scientific Games Corp (NASDAQ:SGMS). Fine Capital Partners has a $186 million position in the stock, comprising 41.9% of its 13F portfolio. On Fine Capital Partners’s heels is Sylebra Capital Management, managed by Daniel Patrick Gibson, which holds a $175.4 million position; 7.7% of its 13F portfolio is allocated to the company. Other peers that are bullish encompass Mark Cohen’s Stone House Capital, David Einhorn’s Greenlight Capital and Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management. In terms of the portfolio weights assigned to each position Stone House Capital allocated the biggest weight to Scientific Games Corp (NASDAQ:SGMS), around 100% of its 13F portfolio. Fine Capital Partners is also relatively very bullish on the stock, earmarking 41.95 percent of its 13F equity portfolio to SGMS.

Seeing as Scientific Games Corp (NASDAQ:SGMS) has faced a decline in interest from the smart money, logic holds that there was a specific group of money managers that elected to cut their entire stakes heading into Q4. At the top of the heap, Alex Sacerdote’s Whale Rock Capital Management dumped the biggest stake of all the hedgies watched by Insider Monkey, comprising close to $21.2 million in stock. Bernard Selz’s fund, Selz Capital, also cut its stock, about $1.7 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Scientific Games Corp (NASDAQ:SGMS) but similarly valued. We will take a look at Ligand Pharmaceuticals Inc. (NASDAQ:LGND), AssetMark Financial Holdings, Inc. (NYSE:AMK), Great Western Bancorp Inc (NYSE:GWB), and National Vision Holdings, Inc. (NASDAQ:EYE). This group of stocks’ market values are closest to SGMS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LGND 20 371572 1
AMK 10 44658 10
GWB 11 46049 2
EYE 22 344437 1
Average 15.75 201679 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $202 million. That figure was $576 million in SGMS’s case. National Vision Holdings, Inc. (NASDAQ:EYE) is the most popular stock in this table. On the other hand AssetMark Financial Holdings, Inc. (NYSE:AMK) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Scientific Games Corp (NASDAQ:SGMS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on SGMS as the stock returned 49.8% in 2019 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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