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 Index returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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’ 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 ScanSource, Inc. (NASDAQ:SCSC).
Is ScanSource, Inc. (NASDAQ:SCSC) a healthy stock for your portfolio? Hedge funds are becoming less confident. The number of long hedge fund positions shrunk by 2 lately. Our calculations also showed that SCSC isn’t among the 30 most popular stocks among hedge funds. SCSC was in 10 hedge funds’ portfolios at the end of March. There were 12 hedge funds in our database with SCSC positions at the end of the previous quarter.
If you’d ask most traders, hedge funds are viewed as worthless, old financial vehicles of years past. While there are over 8000 funds in operation at the moment, We look at the bigwigs of this club, around 750 funds. It is estimated that this group of investors manage most of the smart money’s total asset base, and by keeping an eye on their top investments, Insider Monkey has deciphered several investment strategies that have historically defeated the S&P 500 index. Insider Monkey’s flagship hedge fund strategy outstripped the S&P 500 index by around 5 percentage points per year since its inception in May 2014 through June 18th. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 28.2% since February 2017 (through June 18th) even though the market was up nearly 30% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 8.2% in a month whereas our long picks outperformed the market by 2.5 percentage points in this volatile 5 week period (our long picks also beat the market by 15 percentage points so far this year).
Let’s review the fresh hedge fund action surrounding ScanSource, Inc. (NASDAQ:SCSC).
How have hedgies been trading ScanSource, Inc. (NASDAQ:SCSC)?
Heading into the second quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the fourth quarter of 2018. On the other hand, there were a total of 9 hedge funds with a bullish position in SCSC 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, Pzena Investment Management was the largest shareholder of ScanSource, Inc. (NASDAQ:SCSC), with a stake worth $38.9 million reported as of the end of March. Trailing Pzena Investment Management was AQR Capital Management, which amassed a stake valued at $6.1 million. Two Sigma Advisors, Renaissance Technologies, and D E Shaw were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as ScanSource, Inc. (NASDAQ:SCSC) has experienced falling interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of fund managers who sold off their positions entirely heading into Q3. It’s worth mentioning that Israel Englander’s Millennium Management dropped the biggest stake of all the hedgies followed by Insider Monkey, totaling an estimated $0.6 million in stock. David Costen Haley’s fund, HBK Investments, also dropped its stock, about $0.4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 2 funds heading into Q3.
Let’s go over hedge fund activity in other stocks similar to ScanSource, Inc. (NASDAQ:SCSC). These stocks are SunPower Corporation (NASDAQ:SPWR), Middlesex Water Company (NASDAQ:MSEX), Cheetah Mobile Inc (NYSE:CMCM), and Genesco Inc. (NYSE:GCO). All of these stocks’ market caps are closest to SCSC’s market cap.
|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 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $50 million in SCSC’s case. Genesco Inc. (NYSE:GCO) is the most popular stock in this table. On the other hand Cheetah Mobile Inc (NYSE:CMCM) is the least popular one with only 4 bullish hedge fund positions. ScanSource, Inc. (NASDAQ:SCSC) 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 SCSC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SCSC investors were disappointed as the stock returned -10.6% 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.