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 Harsco Corporation (NYSE:HSC).
Is HSC a good stock to buy now? Harsco Corporation (NYSE:HSC) has seen a decrease in support from the world’s most elite money managers lately. Harsco Corporation (NYSE:HSC) was in 13 hedge funds’ portfolios at the end of September. The all time high for this statistic is 26. Our calculations also showed that HSC isn’t among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. Keeping this in mind we’re going to take a glance at the latest hedge fund action encompassing Harsco Corporation (NYSE:HSC).
Do Hedge Funds Think HSC Is A Good Stock To Buy Now?
At the end of September, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HSC over the last 21 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the largest position in Harsco Corporation (NYSE:HSC). Royce & Associates has a $16.3 million position in the stock, comprising 0.2% of its 13F portfolio. The second largest stake is held by Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, holding a $10 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism contain D. E. Shaw’s D E Shaw, Thomas Ellis and Todd Hammer’s North Run Capital and Andrew Wallach and Jason Ader’s Cumberland Associates / Springowl Associates. In terms of the portfolio weights assigned to each position North Run Capital allocated the biggest weight to Harsco Corporation (NYSE:HSC), around 6.31% of its 13F portfolio. Cumberland Associates / Springowl Associates is also relatively very bullish on the stock, earmarking 3.87 percent of its 13F equity portfolio to HSC.
Due to the fact that Harsco Corporation (NYSE:HSC) has experienced declining sentiment 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. Intriguingly, Phill Gross and Robert Atchinson’s Adage Capital Management said goodbye to the largest position of the 750 funds followed by Insider Monkey, totaling close to $43.1 million in stock. Todd J. Kantor’s fund, Encompass Capital Advisors, also said goodbye to its stock, about $19.1 million worth. These moves are important to note, as aggregate hedge fund interest fell by 2 funds heading into Q4.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Harsco Corporation (NYSE:HSC) but similarly valued. We will take a look at Supernus Pharmaceuticals Inc (NASDAQ:SUPN), Griffon Corporation (NYSE:GFF), NGM Biopharmaceuticals, Inc. (NASDAQ:NGM), Calix Inc (NYSE:CALX), Getty Realty Corp. (NYSE:GTY), Realogy Holdings Corp (NYSE:RLGY), and K12 Inc. (NYSE:LRN). This group of stocks’ market valuations are closest to HSC’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.1 hedge funds with bullish positions and the average amount invested in these stocks was $160 million. That figure was $41 million in HSC’s case. Realogy Holdings Corp (NYSE:RLGY) is the most popular stock in this table. On the other hand NGM Biopharmaceuticals, Inc. (NASDAQ:NGM) is the least popular one with only 12 bullish hedge fund positions. Harsco Corporation (NYSE:HSC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HSC is 21.3. 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. 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 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on HSC as the stock returned 37.7% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.