Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Stepan Company (NYSE:SCL).
Is SCL a good stock to buy now? The best stock pickers were cutting their exposure. The number of long hedge fund bets retreated by 3 in recent months. Stepan Company (NYSE:SCL) was in 12 hedge funds’ portfolios at the end of September. The all time high for this statistics is 16. Our calculations also showed that SCL 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 gander at the latest hedge fund action surrounding Stepan Company (NYSE:SCL).
Do Hedge Funds Think SCL Is A Good Stock To Buy Now?
At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in SCL a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Stepan Company (NYSE:SCL) was held by Renaissance Technologies, which reported holding $25.3 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $10.6 million position. Other investors bullish on the company included AQR Capital Management, Two Sigma Advisors, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Winton Capital Management allocated the biggest weight to Stepan Company (NYSE:SCL), around 0.04% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to SCL.
Since Stepan Company (NYSE:SCL) has experienced falling interest from the smart money, it’s safe to say that there is a sect of money managers that slashed their entire stakes by the end of the third quarter. Intriguingly, D. E. Shaw’s D E Shaw dropped the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $1.1 million in stock. Michael Gelband’s fund, ExodusPoint Capital, also dropped its stock, about $1.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds by the end of the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Stepan Company (NYSE:SCL) but similarly valued. We will take a look at Echostar Corporation (NASDAQ:SATS), Brookfield Business Partners L.P. (NYSE:BBU), Avient Corporation (NYSE:AVNT), Agios Pharmaceuticals Inc (NASDAQ:AGIO), White Mountains Insurance Group Ltd (NYSE:WTM), Merit Medical Systems, Inc. (NASDAQ:MMSI), and Advanced Energy Industries, Inc. (NASDAQ:AEIS). This group of stocks’ market values match SCL’s market value.
|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 $199 million. That figure was $47 million in SCL’s case. Agios Pharmaceuticals Inc (NASDAQ:AGIO) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 4 bullish hedge fund positions. Stepan Company (NYSE:SCL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SCL is 39.3. 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. 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 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 surpassed the market again by 16.2 percentage points. Unfortunately SCL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SCL investors were disappointed as the stock returned 7.5% since the end of September (through 12/8) 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.