How Encore Capital Group, Inc. (ECPG) Stacks Up Against Its Peers

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards Encore Capital Group, Inc. (NASDAQ:ECPG), and what that likely means for the prospects of the company and its stock.

Encore Capital Group, Inc. (NASDAQ:ECPG) shares didn’t see a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds’ portfolios at the end of September, same as at the end of June. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as AeroVironment, Inc. (NASDAQ:AVAV), Epizyme Inc (NASDAQ:EPZM), and PDF Solutions, Inc. (NASDAQ:PDFS) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

Hedge fund activity in Encore Capital Group, Inc. (NASDAQ:ECPG)

At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, unchanged from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in ECPG heading into this year, so hedge fund sentiment has dipped quite a bit in 2016. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Carlson Capital, led by Clint Carlson, holds the biggest position in Encore Capital Group, Inc. (NASDAQ:ECPG). Carlson Capital has a $35.9 million position in the stock. Coming in second is Red Mountain Capital, led by Willem Mesdag, which holds a $31.2 million position; the fund has 9.4% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism comprise Ken Griffin’s Citadel Investment Group, Jay Petschek and Steven Major’s Corsair Capital Management, and D E Shaw, one of the biggest hedge funds in the world. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds, which is based on the performance of their 13F long positions in non-micro-cap stocks.

Since Encore Capital Group, Inc. (NASDAQ:ECPG) has witnessed falling interest from hedge fund managers, it’s safe to say that there lies a certain “tier” of fund managers that slashed their full holdings last quarter. At the top of the heap, Israel Englander’s Millennium Management got rid of the largest stake of all the investors tracked by Insider Monkey, comprising close to $1.7 million in stock, and Matthew Tewksbury’s Stevens Capital Management was right behind this move, as the fund dumped about $0.2 million worth of shares.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Encore Capital Group, Inc. (NASDAQ:ECPG) but similarly valued. These stocks are AeroVironment, Inc. (NASDAQ:AVAV), Epizyme Inc (NASDAQ:EPZM), PDF Solutions, Inc. (NASDAQ:PDFS), and SP Plus Corp (NASDAQ:SP). This group of stocks’ market values resemble ECPG’s market value.

As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $52 million. That figure was $69 million in ECPG’s case. Epizyme Inc (NASDAQ:EPZM) is the most popular stock in this table. On the other hand AeroVironment, Inc. (NASDAQ:AVAV) is the least popular one with only 5 bullish hedge fund positions. Encore Capital Group, Inc. (NASDAQ:ECPG) 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. In this regard EPZM might be a better candidate to consider taking a long position in.

Disclosure: None