Were Hedge Funds Right About Piling Into Servicesource International Inc (SREV)?

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 thoughtServicesource International Inc (NASDAQ:SREV) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Servicesource International Inc (NASDAQ:SREV) investors should be aware of a decrease in support from the world’s most elite money managers lately. SREV was in 12 hedge funds’ portfolios at the end of March. There were 14 hedge funds in our database with SREV positions at the end of the previous quarter. Our calculations also showed that SREV 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.

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 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Carlo Cannell

J. Carlo Cannell of Cannell Capital

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 glance at the latest hedge fund action surrounding Servicesource International Inc (NASDAQ:SREV).

How are hedge funds trading Servicesource International Inc (NASDAQ:SREV)?

At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SREV over the last 18 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

More specifically, Archon Capital Management was the largest shareholder of Servicesource International Inc (NASDAQ:SREV), with a stake worth $7.1 million reported as of the end of September. Trailing Archon Capital Management was Cannell Capital, which amassed a stake valued at $4.4 million. Renaissance Technologies, Headlands Capital, and Springbok Capital 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 Headlands Capital allocated the biggest weight to Servicesource International Inc (NASDAQ:SREV), around 3.89% of its 13F portfolio. Archon Capital Management is also relatively very bullish on the stock, earmarking 2.6 percent of its 13F equity portfolio to SREV.

Because Servicesource International Inc (NASDAQ:SREV) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there is a sect of fund managers that decided to sell off their entire stakes in the first quarter. Intriguingly, David Nguyen and Nancy Oh’s One68 Global Capital dropped the largest position of the 750 funds tracked by Insider Monkey, valued at an estimated $0.2 million in stock, and Ari Zweiman’s 683 Capital Partners was right behind this move, as the fund dropped about $0.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Servicesource International Inc (NASDAQ:SREV). These stocks are Postal Realty Trust, Inc. (NYSE:PSTL), Frequency Electronics, Inc. (NASDAQ:FEIM), Harvard Bioscience, Inc. (NASDAQ:HBIO), and Radcom Ltd. (NASDAQ:RDCM). This group of stocks’ market values resemble SREV’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PSTL 4 18028 0
FEIM 3 8954 0
HBIO 11 22612 -3
RDCM 4 9385 -1
Average 5.5 14745 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.5 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $21 million in SREV’s case. Harvard Bioscience, Inc. (NASDAQ:HBIO) is the most popular stock in this table. On the other hand Frequency Electronics, Inc. (NASDAQ:FEIM) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Servicesource International Inc (NASDAQ:SREV) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on SREV as the stock returned 79.5% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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