Did Hedge Funds Make The Right Call On Element Solutions Inc. (ESI) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Element Solutions Inc. (NYSE:ESI) and determine whether hedge funds skillfully traded this stock.

Element Solutions Inc. (NYSE:ESI) was in 35 hedge funds’ portfolios at the end of March. ESI shareholders have witnessed a decrease in hedge fund interest in recent months. There were 37 hedge funds in our database with ESI positions at the end of the previous quarter. Our calculations also showed that ESI 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a 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 we’re going to analyze the key hedge fund action surrounding Element Solutions Inc. (NYSE:ESI).

How have hedgies been trading Element Solutions Inc. (NYSE:ESI)?

At the end of the first quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the fourth quarter of 2019. On the other hand, there were a total of 32 hedge funds with a bullish position in ESI a year ago. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Is ESI A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Jeffrey Gates’s Gates Capital Management has the number one position in Element Solutions Inc. (NYSE:ESI), worth close to $91.1 million, corresponding to 6% of its total 13F portfolio. Coming in second is Paul Singer of Elliott Management, with a $59 million position; the fund has 1.1% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism contain Brian Bares’s Bares Capital Management, Larry Robbins’s Glenview Capital and Mubadala Investment’s MIC Capital Partners. In terms of the portfolio weights assigned to each position Scoggin allocated the biggest weight to Element Solutions Inc. (NYSE:ESI), around 13.85% of its 13F portfolio. MIC Capital Partners is also relatively very bullish on the stock, designating 12.35 percent of its 13F equity portfolio to ESI.

Seeing as Element Solutions Inc. (NYSE:ESI) has faced bearish sentiment from the smart money, logic holds that there was a specific group of funds that elected to cut their full holdings in the first quarter. It’s worth mentioning that Javier Velazquez’s Albar Capital sold off the largest investment of the 750 funds watched by Insider Monkey, totaling an estimated $15.2 million in stock. Brandon Haley’s fund, Holocene Advisors, also sold off its stock, about $2.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Element Solutions Inc. (NYSE:ESI) but similarly valued. We will take a look at PotlatchDeltic Corporation (NASDAQ:PCH), John Wiley & Sons Inc (NYSE:JW), Webster Financial Corporation (NYSE:WBS), and Energizer Holdings, Inc. (NYSE:ENR). This group of stocks’ market valuations are similar to ESI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PCH 16 234507 0
JW 17 55212 -4
WBS 33 223111 9
ENR 21 119723 -1
Average 21.75 158138 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $158 million. That figure was $387 million in ESI’s case. Webster Financial Corporation (NYSE:WBS) is the most popular stock in this table. On the other hand PotlatchDeltic Corporation (NASDAQ:PCH) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Element Solutions Inc. (NYSE:ESI) 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 ESI as the stock returned 29.8% 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.