Should You Mimic the Smart Money’s Buying Spree of Sensient Technologies Corporation (SXT)?

Hedge fund managers like David Einhorn, Dan Loeb, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Sensient Technologies Corporation (NYSE:SXT).

Sensient Technologies Corporation (NYSE:SXT) investors should be aware of an increase in enthusiasm from smart money lately. SXT was in 16 hedge funds’ portfolios at the end of September. There were 9 hedge funds in our database with SXT holdings at the end of the previous quarter. 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 Olin Corporation (NYSE:OLN), Cameco Corporation (USA) (NYSE:CCJ), and Cavium Inc (NASDAQ:CAVM) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

What have hedge funds been doing with Sensient Technologies Corporation (NYSE:SXT)?

At Q3’s end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a 78% leap from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SXT over the last 5 quarters, which fell heavily in Q1 before the recent rebound. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Mario Gabelli’s GAMCO Investors has the largest position in Sensient Technologies Corporation (NYSE:SXT), worth close to $66.2 million. The second most bullish fund manager is Marshall Wace LLP, led by Paul Marshall and Ian Wace, holding a $31.2 million position. Some other professional money managers with similar optimism include Andrew Sandler’s Sandler Capital Management, Robert Joseph Caruso’s Select Equity Group, and Millennium Management, one of the 10 largest hedge funds in the world. 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.

With general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Sandler Capital Management assembled the biggest position in Sensient Technologies Corporation (NYSE:SXT). Sandler Capital Management had $22.8 million invested in the company at the end of the quarter. Select Equity Group also made a $20.6 million investment in the stock during the quarter. The following funds were also among the new SXT investors: Israel Englander’s Millennium Management, James Dondero’s Highland Capital Management, and Peter Algert and Kevin Coldiron’s Algert Coldiron Investors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Sensient Technologies Corporation (NYSE:SXT) but similarly valued. These stocks are Olin Corporation (NYSE:OLN), Cameco Corporation (USA) (NYSE:CCJ), Cavium Inc (NASDAQ:CAVM), and Pitney Bowes Inc. (NYSE:PBI). This group of stocks’ market valuations match SXT’s market valuation.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $475 million. That figure was $176 million in SXT’s case. Cavium Inc (NASDAQ:CAVM) is the most popular stock in this table. On the other hand Cameco Corporation (USA) (NYSE:CCJ) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Sensient Technologies Corporation (NYSE:SXT) is even less popular than CCJ. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news, especially given the recent surge in the stock’s ownership. However, we would hold off for one more quarter to see whether hedge funds are holding onto their shares or even adding to their positions, or if they just decided to trade in and out of the stock.

Disclosure: None