Is Stein Mart, Inc. (SMRT) A Good Stock To Buy?

Looking for high-potential stocks? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.2% in the 12 months ending October 30, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a winner by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of September 2014) generated a return of 9.5% during the same 12-month period, with 63% of these stock picks outperformed the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 16-year period indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Stein Mart, Inc. (NASDAQ:SMRT).

Stein Mart, Inc. has seen a decrease in activity from the world’s largest hedge funds lately. SMRT was in 13 hedge funds’ portfolios at the end of the third quarter of 2015. There were 16 hedge funds in our database with SMRT holdings at the end of the previous quarter. At the end of this article we will also compare SMRT to other stocks, including Forestar Group Inc. (NYSE:FOR), ReTailMeNot Inc (NASDAQ:SALE), and Sunedison Semiconductor Ltd (NASDAQ:SEMI) to get a better sense of its popularity.

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To most market participants, hedge funds are seen as unimportant, old investment tools of the past. While there are greater than 8000 funds in operation today, Our experts choose to focus on the upper echelon of this group, about 700 funds. These money managers have their hands on the majority of the hedge fund industry’s total asset base, and by shadowing their first-class equity investments, Insider Monkey has come up with a number of investment strategies that have historically defeated the market. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points per year for a decade in their back tests.

Now, we’re going to take a gander at the latest action surrounding Stein Mart, Inc. (NASDAQ:SMRT).

How are hedge funds trading Stein Mart, Inc. (NASDAQ:SMRT)?

At the Q3’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the second quarter. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Royce & Associates, managed by Chuck Royce, holds the largest position in Stein Mart, Inc. (NASDAQ:SMRT). Royce & Associates has a $45.9 million position in the stock, comprising 0.2% of its 13F portfolio. The second largest stake is held by Robert B. Gillam’s McKinley Capital Management, with a $2.8 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism comprise Cliff Asness’ AQR Capital Management, Alexander Mitchell’s Scopus Asset Management and D. E. Shaw’s D E Shaw.

Because Stein Mart, Inc. (NASDAQ:SMRT) has witnessed declining sentiment from the smart money, it’s safe to say that there were a few hedge funds that decided to sell off their entire stakes in the third quarter. Interestingly, Andrew Weiss’ Weiss Asset Management dropped the largest investment of all the hedgies tracked by Insider Monkey, comprising an estimated $1 million in stock, and Roger Ibbotson’s Zebra Capital Management was right behind this move, as the fund sold off about $0.4 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Stein Mart, Inc. (NASDAQ:SMRT) but similarly valued. These stocks are Forestar Group Inc. (NYSE:FOR), ReTailMeNot Inc (NASDAQ:SALE), Sunedison Semiconductor Ltd (NASDAQ:SEMI), and Fred’s, Inc. (NASDAQ:FRED). This group of stocks’ market valuations resemble SMRT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FOR 8 67469 -5
SALE 15 79722 -6
SEMI 21 216785 -3
FRED 5 1638 -2

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $91 million, compared to $62 million in SMRT’s case. Sunedison Semiconductor Ltd (NASDAQ:SEMI) is the most popular stock in this table. On the other hand Fred’s, Inc. (NASDAQ:FRED) is the least popular one with only 5 bullish hedge fund positions. Stein Mart, Inc. (NASDAQ:SMRT) is not the most popular stock in this group, but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard SEMI might be a better candidate to consider a long position.