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Hedge Funds Souring On ShotSpotter, Inc. (SSTI)?

In this article we will check out the progression of hedge fund sentiment towards ShotSpotter, Inc. (NASDAQ:SSTI) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

ShotSpotter, Inc. (NASDAQ:SSTI) investors should pay attention to a decrease in support from the world’s most elite money managers lately. SSTI was in 5 hedge funds’ portfolios at the end of March. There were 6 hedge funds in our database with SSTI holdings at the end of the previous quarter. Our calculations also showed that SSTI 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.

Richard Driehaus of Driehaus Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s review the latest hedge fund action encompassing ShotSpotter, Inc. (NASDAQ:SSTI).

What does smart money think about ShotSpotter, Inc. (NASDAQ:SSTI)?

At the end of the first quarter, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 7 hedge funds with a bullish position in SSTI a year ago. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Is SSTI A Good Stock To Buy?

Among these funds, Nine Ten Partners held the most valuable stake in ShotSpotter, Inc. (NASDAQ:SSTI), which was worth $7.4 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $3.8 million worth of shares. Millennium Management, G2 Investment Partners Management, and Two Sigma Advisors 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 Nine Ten Partners allocated the biggest weight to ShotSpotter, Inc. (NASDAQ:SSTI), around 2.95% of its 13F portfolio. G2 Investment Partners Management is also relatively very bullish on the stock, earmarking 0.57 percent of its 13F equity portfolio to SSTI.

Seeing as ShotSpotter, Inc. (NASDAQ:SSTI) has faced falling interest from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of hedge funds that elected to cut their entire stakes by the end of the first quarter. It’s worth mentioning that Marc Majzner’s Clearline Capital said goodbye to the largest stake of the 750 funds monitored by Insider Monkey, totaling about $3.2 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $0.5 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 1 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to ShotSpotter, Inc. (NASDAQ:SSTI). These stocks are Graf Industrial Corp. (NYSE:GRAF), Heritage Insurance Holdings Inc (NYSE:HRTG), Hingham Institution for Savings (NASDAQ:HIFS), and Tristate Capital Holdings Inc (NASDAQ:TSC). All of these stocks’ market caps are closest to SSTI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GRAF 11 114571 -1
HRTG 7 19577 -1
HIFS 3 4293 0
TSC 16 23757 4
Average 9.25 40550 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $16 million in SSTI’s case. Tristate Capital Holdings Inc (NASDAQ:TSC) is the most popular stock in this table. On the other hand Hingham Institution for Savings (NASDAQ:HIFS) is the least popular one with only 3 bullish hedge fund positions. ShotSpotter, Inc. (NASDAQ:SSTI) 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 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 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately SSTI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SSTI investors were disappointed as the stock returned -15.4% 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.