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Did Hedge Funds Make The Right Call On Encompass Health Corporation (EHC) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Encompass Health Corporation (NYSE:EHC) and determine whether hedge funds had an edge regarding this stock.

Encompass Health Corporation (NYSE:EHC) investors should be aware of an increase in hedge fund interest recently. EHC was in 33 hedge funds’ portfolios at the end of the first quarter of 2020. There were 29 hedge funds in our database with EHC holdings at the end of the previous quarter. Our calculations also showed that EHC 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 today’s marketplace there are numerous gauges shareholders can use to size up publicly traded companies. Two of the best gauges are hedge fund and insider trading moves. We have shown that, historically, those who follow the top picks of the top money managers can outclass the market by a very impressive amount (see the details here).

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind we’re going to review the latest hedge fund action regarding Encompass Health Corporation (NYSE:EHC).

How are hedge funds trading Encompass Health Corporation (NYSE:EHC)?

At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in EHC over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Is EHC A Good Stock To Buy?

More specifically, Healthcor Management LP was the largest shareholder of Encompass Health Corporation (NYSE:EHC), with a stake worth $97.7 million reported as of the end of September. Trailing Healthcor Management LP was Viking Global, which amassed a stake valued at $92.6 million. Citadel Investment Group, Rock Springs Capital Management, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Iron Triangle Partners allocated the biggest weight to Encompass Health Corporation (NYSE:EHC), around 9.91% of its 13F portfolio. Healthcor Management LP is also relatively very bullish on the stock, designating 4.18 percent of its 13F equity portfolio to EHC.

As industrywide interest jumped, key money managers were leading the bulls’ herd. Healthcor Management LP, managed by Arthur B Cohen and Joseph Healey, initiated the most outsized position in Encompass Health Corporation (NYSE:EHC). Healthcor Management LP had $97.7 million invested in the company at the end of the quarter. Andreas Halvorsen’s Viking Global also made a $92.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Krishen Sud’s Sivik Global Healthcare, and Bhagwan Jay Rao’s Integral Health Asset Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Encompass Health Corporation (NYSE:EHC) but similarly valued. These stocks are Interpublic Group of Companies Inc (NYSE:IPG), Charles River Laboratories International Inc. (NYSE:CRL), Hubbell Incorporated (NYSE:HUBB), and Assurant, Inc. (NYSE:AIZ). All of these stocks’ market caps are similar to EHC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IPG 21 594460 -5
CRL 36 862557 4
HUBB 15 272338 -8
AIZ 33 782609 8
Average 26.25 627991 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $628 million. That figure was $557 million in EHC’s case. Charles River Laboratories International Inc. (NYSE:CRL) is the most popular stock in this table. On the other hand Hubbell Incorporated (NYSE:HUBB) is the least popular one with only 15 bullish hedge fund positions. Encompass Health Corporation (NYSE:EHC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 but beat the market by 15.5 percentage points. Unfortunately EHC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EHC were disappointed as the stock returned -2.8% during the same time period 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 many of these stocks already outperformed the market so far this year.

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