We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Service Corporation International (NYSE:SCI) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Service Corporation International (NYSE:SCI) was in 18 hedge funds’ portfolios at the end of December. SCI has seen a decrease in hedge fund interest recently. There were 20 hedge funds in our database with SCI positions at the end of the previous quarter. Our calculations also showed that SCI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the recent hedge fund action regarding Service Corporation International (NYSE:SCI).
How are hedge funds trading Service Corporation International (NYSE:SCI)?
At the end of the fourth quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the third quarter of 2019. By comparison, 17 hedge funds held shares or bullish call options in SCI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Robert Joseph Caruso’s Select Equity Group has the number one position in Service Corporation International (NYSE:SCI), worth close to $242.6 million, corresponding to 1.5% of its total 13F portfolio. On Select Equity Group’s heels is John Overdeck and David Siegel of Two Sigma Advisors, with a $19.8 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish comprise Noam Gottesman’s GLG Partners, Paul Marshall and Ian Wace’s Marshall Wace LLP and Charles Clough’s Clough Capital Partners. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to Service Corporation International (NYSE:SCI), around 1.53% of its 13F portfolio. Clough Capital Partners is also relatively very bullish on the stock, designating 0.98 percent of its 13F equity portfolio to SCI.
Judging by the fact that Service Corporation International (NYSE:SCI) has experienced bearish sentiment from the smart money, it’s easy to see that there is a sect of funds that elected to cut their positions entirely heading into Q4. Interestingly, Dmitry Balyasny’s Balyasny Asset Management said goodbye to the biggest investment of all the hedgies monitored by Insider Monkey, worth about $15.1 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $3.8 million worth. These moves are important to note, as total hedge fund interest was cut by 2 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Service Corporation International (NYSE:SCI) but similarly valued. We will take a look at Bio-Techne Corporation (NASDAQ:TECH), Alaska Air Group, Inc. (NYSE:ALK), Brookfield Renewable Partners L.P. (NYSE:BEP), and NovoCure Limited (NASDAQ:NVCR). This group of stocks’ market valuations are closest to SCI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TECH | 26 | 266703 | 5 |
| ALK | 39 | 627119 | 4 |
| BEP | 4 | 11244 | 0 |
| NVCR | 22 | 450885 | -2 |
| Average | 22.75 | 338988 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $339 million. That figure was $320 million in SCI’s case. Alaska Air Group, Inc. (NYSE:ALK) is the most popular stock in this table. On the other hand Brookfield Renewable Partners L.P. (NYSE:BEP) is the least popular one with only 4 bullish hedge fund positions. Service Corporation International (NYSE:SCI) is not the least popular stock in this group but hedge fund interest is still below average. 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 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on SCI as the stock returned -9.8% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
