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Did Hedge Funds Make The Right Call On Envista Holdings Corporation (NVST) ?

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 Envista Holdings Corporation (NYSE:NVST) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Envista Holdings Corporation (NYSE:NVST) investors should be aware of a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that NVST 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.

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 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 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.

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. 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 if you have any good ideas send us an email. Keeping this in mind let’s view the latest hedge fund action regarding Envista Holdings Corporation (NYSE:NVST).

How are hedge funds trading Envista Holdings Corporation (NYSE:NVST)?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -48% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in NVST a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Gates Capital Management was the largest shareholder of Envista Holdings Corporation (NYSE:NVST), with a stake worth $55.3 million reported as of the end of September. Trailing Gates Capital Management was Ariel Investments, which amassed a stake valued at $52.1 million. Paradice Investment Management, Polar Capital, and D E Shaw 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 Paradice Investment Management allocated the biggest weight to Envista Holdings Corporation (NYSE:NVST), around 4.43% of its 13F portfolio. Sio Capital is also relatively very bullish on the stock, dishing out 4.29 percent of its 13F equity portfolio to NVST.

Since Envista Holdings Corporation (NYSE:NVST) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there is a sect of hedge funds who were dropping their positions entirely in the first quarter. At the top of the heap, Ricky Sandler’s Eminence Capital dropped the biggest position of all the hedgies tracked by Insider Monkey, worth about $90 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dropped about $65.2 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 20 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Envista Holdings Corporation (NYSE:NVST). We will take a look at Tripadvisor Inc (NASDAQ:TRIP), Tegna Inc (NYSE:TGNA), Parsley Energy Inc (NYSE:PE), and FireEye Inc (NASDAQ:FEYE). This group of stocks’ market values match NVST’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TRIP 30 492031 -9
TGNA 29 377379 10
PE 45 437697 -7
FEYE 32 159577 2
Average 34 366671 -1

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 $367 million. That figure was $274 million in NVST’s case. Parsley Energy Inc (NYSE:PE) is the most popular stock in this table. On the other hand Tegna Inc (NYSE:TGNA) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks Envista Holdings Corporation (NYSE:NVST) is even less popular than TGNA. Hedge funds clearly dropped the ball on NVST as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 NVST as the stock returned 41.2% in 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.