Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards South Jersey Industries Inc (NYSE:SJI).
Is SJI a good stock to buy now? South Jersey Industries Inc (NYSE:SJI) was in 13 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 18. SJI shareholders have witnessed a decrease in enthusiasm from smart money in recent months. There were 14 hedge funds in our database with SJI holdings at the end of June. Our calculations also showed that SJI isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
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 66 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.
Ric Dillon Diamond Hill Capital
Ric Dillon of Diamond Hill Capital
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 recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Now let's take a look at the key hedge fund action regarding South Jersey Industries Inc (NYSE:SJI).
Do Hedge Funds Think SJI Is A Good Stock To Buy Now?
At the end of September, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SJI over the last 21 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Is SJI A Good Stock To Buy?
When looking at the institutional investors followed by Insider Monkey, Diamond Hill Capital, managed by Ric Dillon, holds the largest position in South Jersey Industries Inc (NYSE:SJI). Diamond Hill Capital has a $57.4 million position in the stock, comprising 0.3% of its 13F portfolio. Sitting at the No. 2 spot is Ken Griffin of Citadel Investment Group, with a $8.3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish consist of D. E. Shaw's D E Shaw, Michael Gelband's ExodusPoint Capital and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Diamond Hill Capital allocated the biggest weight to South Jersey Industries Inc (NYSE:SJI), around 0.32% of its 13F portfolio. AlphaCrest Capital Management is also relatively very bullish on the stock, designating 0.07 percent of its 13F equity portfolio to SJI.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Zimmer Partners. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified SJI as a viable investment and initiated a position in the stock.
Let's also examine hedge fund activity in other stocks similar to South Jersey Industries Inc (NYSE:SJI). These stocks are Medifast, Inc. (NYSE:MED), Brinker International, Inc. (NYSE:EAT), Visteon Corp (NYSE:VC), Cardlytics, Inc. (NASDAQ:CDLX), FormFactor, Inc. (NASDAQ:FORM), Magellan Health Inc (NASDAQ:MGLN), and Essential Properties Realty Trust, Inc. (NYSE:EPRT). This group of stocks' market values resemble SJI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MED,21,316364,3 EAT,35,437585,8 VC,28,319170,5 CDLX,29,599537,2 FORM,20,92137,-3 MGLN,21,449995,-2 EPRT,12,79272,-1 Average,23.7,327723,1.7 [/table]
As you can see these stocks had an average of 23.7 hedge funds with bullish positions and the average amount invested in these stocks was $328 million. That figure was $80 million in SJI's case. Brinker International, Inc. (NYSE:EAT) is the most popular stock in this table. On the other hand Essential Properties Realty Trust, Inc. (NYSE:EPRT) is the least popular one with only 12 bullish hedge fund positions. South Jersey Industries Inc (NYSE:SJI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SJI is 27.8. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on SJI as the stock returned 18% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.
