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Were Hedge Funds Right About Ditching Scholastic Corp (SCHL)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtScholastic Corp (NASDAQ:SCHL) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Scholastic Corp (NASDAQ:SCHL) a splendid investment right now? Money managers were getting less bullish. The number of bullish hedge fund positions were trimmed by 4 in recent months. Our calculations also showed that SCHL 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). SCHL was in 11 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with SCHL positions at the end of the previous quarter.

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

In today’s marketplace there are a lot of metrics shareholders employ to assess stocks. A couple of the most innovative metrics are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the top picks of the elite fund managers can outperform the broader indices by a significant margin (see the details here).

Millennium Management, Catapult Capital Management

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a peek at the latest hedge fund action encompassing Scholastic Corp (NASDAQ:SCHL).

Hedge fund activity in Scholastic Corp (NASDAQ:SCHL)

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in SCHL over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Is SCHL A Good Stock To Buy?

The largest stake in Scholastic Corp (NASDAQ:SCHL) was held by Royce & Associates, which reported holding $35.6 million worth of stock at the end of September. It was followed by Winton Capital Management with a $2 million position. Other investors bullish on the company included Millennium Management, Renaissance Technologies, and D E Shaw. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Scholastic Corp (NASDAQ:SCHL), around 0.5% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.49 percent of its 13F equity portfolio to SCHL.

Seeing as Scholastic Corp (NASDAQ:SCHL) has faced falling interest from the entirety of the hedge funds we track, we can see that there was a specific group of money managers that elected to cut their full holdings in the first quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest stake of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $6.4 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $1.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Scholastic Corp (NASDAQ:SCHL). These stocks are Axonics Modulation Technologies, Inc. (NASDAQ:AXNX), Stratasys, Ltd. (NASDAQ:SSYS), Schweitzer-Mauduit International, Inc. (NYSE:SWM), and SeaWorld Entertainment Inc (NYSE:SEAS). This group of stocks’ market valuations are closest to SCHL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AXNX 22 282163 -1
SSYS 14 60722 -4
SWM 10 25342 -3
SEAS 27 455794 -12
Average 18.25 206005 -5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $206 million. That figure was $44 million in SCHL’s case. SeaWorld Entertainment Inc (NYSE:SEAS) is the most popular stock in this table. On the other hand Schweitzer-Mauduit International, Inc. (NYSE:SWM) is the least popular one with only 10 bullish hedge fund positions. Scholastic Corp (NASDAQ:SCHL) 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately SCHL wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SCHL investors were disappointed as the stock returned 18.1% 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.