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Hedge Funds Have Never Been This Bullish On SecureWorks Corp. (SCWX)

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 8 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of SecureWorks Corp. (NASDAQ:SCWX).

Is SecureWorks Corp. (NASDAQ:SCWX) the right investment to pursue these days? Prominent investors are becoming hopeful. The number of bullish hedge fund positions moved up by 3 lately. Our calculations also showed that SCWX isn’t among the 30 most popular stocks among hedge funds. SCWX was in 12 hedge funds’ portfolios at the end of March. There were 9 hedge funds in our database with SCWX positions at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Bruce Kovner, Caxton Associates LP

We’re going to take a glance at the key hedge fund action surrounding SecureWorks Corp. (NASDAQ:SCWX).

Hedge fund activity in SecureWorks Corp. (NASDAQ:SCWX)

Heading into the second quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 33% from one quarter earlier. By comparison, 8 hedge funds held shares or bullish call options in SCWX a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

SCWX_june2019

Among these funds, Royce & Associates held the most valuable stake in SecureWorks Corp. (NASDAQ:SCWX), which was worth $11.1 million at the end of the first quarter. On the second spot was Masters Capital Management which amassed $9.2 million worth of shares. Moreover, Renaissance Technologies, Millennium Management, and Two Sigma Advisors were also bullish on SecureWorks Corp. (NASDAQ:SCWX), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into SecureWorks Corp. (NASDAQ:SCWX) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in SecureWorks Corp. (NASDAQ:SCWX). Arrowstreet Capital had $1.5 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also initiated a $0.7 million position during the quarter. The other funds with new positions in the stock are Ken Griffin’s Citadel Investment Group, Matthew Hulsizer’s PEAK6 Capital Management, and Bruce Kovner’s Caxton Associates LP.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as SecureWorks Corp. (NASDAQ:SCWX) but similarly valued. These stocks are Cooper Tire & Rubber Company (NYSE:CTB), Fitbit Inc (NYSE:FIT), Chesapeake Utilities Corporation (NYSE:CPK), and Puma Biotechnology Inc (NASDAQ:PBYI). All of these stocks’ market caps match SCWX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CTB 17 145708 0
FIT 18 154058 3
CPK 11 36273 1
PBYI 23 437098 1
Average 17.25 193284 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $193 million. That figure was $35 million in SCWX’s case. Puma Biotechnology Inc (NASDAQ:PBYI) is the most popular stock in this table. On the other hand Chesapeake Utilities Corporation (NYSE:CPK) is the least popular one with only 11 bullish hedge fund positions. SecureWorks Corp. (NASDAQ:SCWX) 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately SCWX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SCWX investors were disappointed as the stock returned -24.9% 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.

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

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