SmileDirectClub, Inc. (SDC): Hedge Funds In Wait-and-See Mode

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding SmileDirectClub, Inc. (NASDAQ:SDC) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in SmileDirectClub, Inc. (NASDAQ:SDC) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that SDC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare SDC to other stocks including EQT Corporation (NYSE:EQT), Bank OZK (NASDAQ:OZK), and Foot Locker, Inc. (NYSE:FL) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Arthur B Cohen and Joseph Healey of Healthcor Management LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox.Keeping this in mind we’re going to check out the recent hedge fund action encompassing SmileDirectClub, Inc. (NASDAQ:SDC).

Hedge fund activity in SmileDirectClub, Inc. (NASDAQ:SDC)

At the end of the second quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in SDC a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Among these funds, Alyeska Investment Group held the most valuable stake in SmileDirectClub, Inc. (NASDAQ:SDC), which was worth $14.7 million at the end of the third quarter. On the second spot was Prentice Capital Management which amassed $9.6 million worth of shares. Coatue Management, Royce & Associates, and Healthcor Management LP were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Prentice Capital Management allocated the biggest weight to SmileDirectClub, Inc. (NASDAQ:SDC), around 3.54% of its 13F portfolio. Ariose Capital is also relatively very bullish on the stock, setting aside 2.9 percent of its 13F equity portfolio to SDC.

Due to the fact that SmileDirectClub, Inc. (NASDAQ:SDC) has experienced falling interest from the smart money, it’s easy to see that there were a few funds that slashed their full holdings heading into Q3. Interestingly, Lei Zhang’s Hillhouse Capital Management dropped the biggest position of the 750 funds watched by Insider Monkey, worth about $13.5 million in stock. Andreas Halvorsen’s fund, Viking Global, also said goodbye to its stock, about $10.7 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as SmileDirectClub, Inc. (NASDAQ:SDC) but similarly valued. We will take a look at EQT Corporation (NYSE:EQT), Bank OZK (NASDAQ:OZK), Foot Locker, Inc. (NYSE:FL), NovaGold Resources Inc. (NYSE:NG), UFP Industries, Inc. (NASDAQ:UFPI), Synovus Financial Corp. (NYSE:SNV), and J2 Global Inc (NASDAQ:JCOM). This group of stocks’ market values are similar to SDC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EQT 34 374313 4
OZK 17 160531 -8
FL 29 309984 8
NG 23 375744 4
UFPI 18 68772 1
SNV 27 185112 -6
JCOM 30 203643 9
Average 25.4 239728 1.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.4 hedge funds with bullish positions and the average amount invested in these stocks was $240 million. That figure was $67 million in SDC’s case. EQT Corporation (NYSE:EQT) is the most popular stock in this table. On the other hand Bank OZK (NASDAQ:OZK) is the least popular one with only 17 bullish hedge fund positions. SmileDirectClub, Inc. (NASDAQ:SDC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SDC is 25.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on SDC as the stock returned 47.8% in the third quarter and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.