Is Stepan Company (SCL) A Good Stock To Buy?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards Stepan Company (NYSE:SCL) , and what that likely means for the prospects of the company and its stock.

Stepan Company (NYSE:SCL) shares didn’t see a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 11 hedge funds’ portfolios at the end of the third quarter of 2016. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Columbia Pipeline Partners LP (NYSE:CPPL), Fairmount Santrol Holdings Inc (NYSE:FMSA), and Etsy Inc (NASDAQ:ETSY) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

Now, we’re going to take a glance at the recent action regarding Stepan Company (NYSE:SCL).

What does the smart money think about Stepan Company (NYSE:SCL)?

Heading into the fourth quarter of 2016, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, unchanged from the second quarter of 2016. Below, you can check out the change in hedge fund sentiment towards SCL over the last 5 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, one of the biggest hedge funds in the world, holds the biggest position in Stepan Company (NYSE:SCL). According to regulatory filings, the fund has an $18.7 million position in the stock, comprising less than 0.1% of its 13F portfolio. Coming in second is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $16.1 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions include Cliff Asness’s AQR Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and David E. Shaw’s D E Shaw. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Algert Coldiron Investors).

Let’s now take a look at hedge fund activity in other stocks similar to Stepan Company (NYSE:SCL). We will take a look at Columbia Pipeline Partners LP (NYSE:CPPL), Fairmount Santrol Holdings Inc (NYSE:FMSA), Etsy Inc (NASDAQ:ETSY), and Oil States International, Inc. (NYSE:OIS). This group of stocks’ market values resemble SCL’s market value.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $161 million. That figure was $50 million in SCL’s case. Fairmount Santrol Holdings Inc (NYSE:FMSA) is the most popular stock in this table. On the other hand Columbia Pipeline Partners LP (NYSE:CPPL) is the least popular one with only 9 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. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard FMSA might be a better candidate to consider taking a long position in.

Disclosure: none.