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Were Hedge Funds Right About Selling Systemax Inc. (SYX)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Systemax Inc. (NYSE:SYX) based on that data and determine whether they were really smart about the stock.

Is Systemax Inc. (NYSE:SYX) a bargain? The best stock pickers were in a pessimistic mood. The number of long hedge fund positions decreased by 2 recently. Our calculations also showed that SYX 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). SYX was in 11 hedge funds’ portfolios at the end of the first quarter of 2020. There were 13 hedge funds in our database with SYX positions at the end of the previous quarter.

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

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital 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. With all of this in mind we’re going to take a gander at the fresh hedge fund action encompassing Systemax Inc. (NYSE:SYX).

What have hedge funds been doing with Systemax Inc. (NYSE:SYX)?

At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in SYX a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, holds the largest position in Systemax Inc. (NYSE:SYX). Renaissance Technologies has a $6.3 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies’s heels is Chuck Royce of Royce & Associates, with a $3.2 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining members of the smart money with similar optimism consist of Cliff Asness’s AQR Capital Management, Ken Griffin’s Citadel Investment Group and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Systemax Inc. (NYSE:SYX), around 0.46% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, earmarking 0.08 percent of its 13F equity portfolio to SYX.

Judging by the fact that Systemax Inc. (NYSE:SYX) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of hedgies who were dropping their entire stakes in the first quarter. At the top of the heap, Brandon Osten’s Venator Capital Management sold off the largest position of the “upper crust” of funds tracked by Insider Monkey, totaling an estimated $3.1 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dumped about $0.9 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 2 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Systemax Inc. (NYSE:SYX) but similarly valued. We will take a look at Central Securities Corporation (NYSE:CET), Hyster-Yale Materials Handling Inc (NYSE:HY), Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM), and Re/Max Holdings Inc (NYSE:RMAX). This group of stocks’ market valuations are similar to SYX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CET 2 11637 1
HY 10 27150 1
RYTM 9 186440 -1
RMAX 6 31947 -11
Average 6.75 64294 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $64 million. That figure was $15 million in SYX’s case. Hyster-Yale Materials Handling Inc (NYSE:HY) is the most popular stock in this table. On the other hand Central Securities Corporation (NYSE:CET) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Systemax Inc. (NYSE:SYX) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately SYX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SYX were disappointed as the stock returned 16.7% 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.