Did Hedge Funds Make The Right Call On Eastman Chemical Company (EMN) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Eastman Chemical Company (NYSE:EMN) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Eastman Chemical Company (NYSE:EMN) the right investment to pursue these days? The best stock pickers were getting less optimistic. The number of bullish hedge fund bets went down by 3 recently. Our calculations also showed that EMN 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). EMN was in 29 hedge funds’ portfolios at the end of March. There were 32 hedge funds in our database with EMN holdings at the end of the previous quarter.

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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.

Phill Gross of Adage 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. Keeping this in mind let’s go over the recent hedge fund action regarding Eastman Chemical Company (NYSE:EMN).

What have hedge funds been doing with Eastman Chemical Company (NYSE:EMN)?

At Q1’s end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the fourth quarter of 2019. By comparison, 30 hedge funds held shares or bullish call options in EMN a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

The largest stake in Eastman Chemical Company (NYSE:EMN) was held by GMT Capital, which reported holding $65 million worth of stock at the end of September. It was followed by AQR Capital Management with a $43.2 million position. Other investors bullish on the company included Millennium Management, D E Shaw, and Citadel Investment Group. In terms of the portfolio weights assigned to each position GMT Capital allocated the biggest weight to Eastman Chemical Company (NYSE:EMN), around 3.65% of its 13F portfolio. Atlantic Investment Management is also relatively very bullish on the stock, setting aside 2.63 percent of its 13F equity portfolio to EMN.

Judging by the fact that Eastman Chemical Company (NYSE:EMN) has witnessed falling interest from hedge fund managers, logic holds that there is a sect of funds that slashed their full holdings last quarter. Interestingly, Ric Dillon’s Diamond Hill Capital dropped the largest stake of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $114.1 million in stock, and Zach Schreiber’s Point State Capital was right behind this move, as the fund dropped about $27.1 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Eastman Chemical Company (NYSE:EMN) but similarly valued. These stocks are American Financial Group, Inc. (NYSE:AFG), Juniper Networks, Inc. (NYSE:JNPR), LKQ Corporation (NASDAQ:LKQ), and Formula One Group (NASDAQ:FWONK). All of these stocks’ market caps resemble EMN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AFG 24 200932 -1
JNPR 34 540661 -3
LKQ 41 1132023 -11
FWONK 37 1125200 0
Average 34 749704 -3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $750 million. That figure was $234 million in EMN’s case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand American Financial Group, Inc. (NYSE:AFG) is the least popular one with only 24 bullish hedge fund positions. Eastman Chemical Company (NYSE:EMN) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on EMN as the stock returned 51% during the second quarter and outperformed the market by an even larger margin.

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