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Is The L.S. Starrett Company (SCX) Going to Burn These Hedge Funds?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards The L.S. Starrett Company (NYSE:SCX).

The L.S. Starrett Company (NYSE:SCX) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 4 hedge funds’ portfolios at the end of March. 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 Golden Minerals Co (NYSE:AUMN), Chaparral Energy, Inc. (NYSE:CHAP), and HyreCar Inc. (NASDAQ:HYRE) to gather more data points. Our calculations also showed that SCX isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 51 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.

Mario Gabelli of GAMCO Investors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a look at the new hedge fund action regarding The L.S. Starrett Company (NYSE:SCX).

What have hedge funds been doing with The L.S. Starrett Company (NYSE:SCX)?

At the end of the first quarter, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 6 hedge funds held shares or bullish call options in SCX a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Renaissance Technologies, holds the largest position in The L.S. Starrett Company (NYSE:SCX). Renaissance Technologies has a $1.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies’s heels is GAMCO Investors, managed by Mario Gabelli, which holds a $1.1 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other peers that are bullish comprise David P. Cohen’s Minerva Advisors, Frederick DiSanto’s Ancora Advisors and . In terms of the portfolio weights assigned to each position Minerva Advisors allocated the biggest weight to The L.S. Starrett Company (NYSE:SCX), around 0.16% of its 13F portfolio. GAMCO Investors is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to SCX.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The L.S. Starrett Company (NYSE:SCX) but similarly valued. We will take a look at Golden Minerals Co (NYSE:AUMN), Chaparral Energy, Inc. (NYSE:CHAP), HyreCar Inc. (NASDAQ:HYRE), and Stein Mart, Inc. (NASDAQ:SMRT). This group of stocks’ market values are similar to SCX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AUMN 1 3 0
CHAP 7 10978 0
HYRE 5 5076 -1
SMRT 3 249 -1
Average 4 4077 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $4 million. That figure was $3 million in SCX’s case. Chaparral Energy, Inc. (NYSE:CHAP) is the most popular stock in this table. On the other hand Golden Minerals Co (NYSE:AUMN) is the least popular one with only 1 bullish hedge fund positions. The L.S. Starrett Company (NYSE:SCX) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately SCX wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SCX investors were disappointed as the stock returned 0.3% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 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.