Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards SmileDirectClub, Inc. (NASDAQ:SDC).
SmileDirectClub, Inc. (NASDAQ:SDC) has seen a decrease in activity from the world’s largest hedge funds lately. SmileDirectClub, Inc. (NASDAQ:SDC) was in 21 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 29. Our calculations also showed that SDC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 115 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.
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Now let’s take a look at the key hedge fund action encompassing SmileDirectClub, Inc. (NASDAQ:SDC).
Do Hedge Funds Think SDC Is A Good Stock To Buy Now?
At Q1’s end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from the fourth quarter of 2020. By comparison, 20 hedge funds held shares or bullish call options in SDC 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.
More specifically, 683 Capital Partners was the largest shareholder of SmileDirectClub, Inc. (NASDAQ:SDC), with a stake worth $34.1 million reported as of the end of March. Trailing 683 Capital Partners was Royce & Associates, which amassed a stake valued at $30.9 million. Citadel Investment Group, Millennium Management, and Balyasny 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 Marathon Partners allocated the biggest weight to SmileDirectClub, Inc. (NASDAQ:SDC), around 2.47% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, earmarking 1.81 percent of its 13F equity portfolio to SDC.
Judging by the fact that SmileDirectClub, Inc. (NASDAQ:SDC) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there exists a select few hedgies who were dropping their full holdings heading into Q2. Interestingly, Charles Clough’s Clough Capital Partners said goodbye to the largest position of all the hedgies followed by Insider Monkey, valued at about $9.1 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dropped about $8.4 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 4 funds heading into Q2.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as SmileDirectClub, Inc. (NASDAQ:SDC) but similarly valued. We will take a look at Terreno Realty Corporation (NYSE:TRNO), Taylor Morrison Home Corp (NYSE:TMHC), Six Flags Entertainment Corp (NYSE:SIX), Mercury Systems Inc (NASDAQ:MRCY), MACOM Technology Solutions Holdings Inc (NASDAQ:MTSI), W.R. Grace & Co. (NYSE:GRA), and BigCommerce Holdings, Inc. (NASDAQ:BIGC). This group of stocks’ market valuations resemble SDC’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $507 million. That figure was $177 million in SDC’s case. W.R. Grace & Co. (NYSE:GRA) is the most popular stock in this table. On the other hand Terreno Realty Corporation (NYSE:TRNO) is the least popular one with only 12 bullish hedge fund positions. SmileDirectClub, Inc. (NASDAQ:SDC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SDC is 37.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and surpassed the market again by 7.7 percentage points. Unfortunately SDC wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); SDC investors were disappointed as the stock returned -33.8% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.
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Disclosure: None. This article was originally published at Insider Monkey.