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Did Hedge Funds Make The Right Call On Essent Group Ltd (ESNT) ?

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 Essent Group Ltd (NYSE:ESNT) and determine whether hedge funds had an edge regarding this stock.

Essent Group Ltd (NYSE:ESNT) was in 26 hedge funds’ portfolios at the end of the first quarter of 2020. ESNT shareholders have witnessed a decrease in hedge fund sentiment recently. There were 36 hedge funds in our database with ESNT holdings at the end of the previous quarter. Our calculations also showed that ESNT 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.

If you’d ask most shareholders, hedge funds are viewed as slow, outdated investment tools of yesteryear. While there are over 8000 funds with their doors open today, Our researchers look at the crème de la crème of this club, approximately 850 funds. These investment experts preside over bulk of all hedge funds’ total capital, and by paying attention to their matchless picks, Insider Monkey has uncovered various investment strategies that have historically outstripped Mr. Market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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. Now let’s take a gander at the key hedge fund action encompassing Essent Group Ltd (NYSE:ESNT).

How are hedge funds trading Essent Group Ltd (NYSE:ESNT)?

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -28% from the previous quarter. By comparison, 27 hedge funds held shares or bullish call options in ESNT a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Among these funds, Polar Capital held the most valuable stake in Essent Group Ltd (NYSE:ESNT), which was worth $60.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $27.2 million worth of shares. GLG Partners, Rima Senvest Management, and Millennium Management 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 Beach Point Capital Management allocated the biggest weight to Essent Group Ltd (NYSE:ESNT), around 3.19% of its 13F portfolio. One Fin Capital Management is also relatively very bullish on the stock, setting aside 2.79 percent of its 13F equity portfolio to ESNT.

Due to the fact that Essent Group Ltd (NYSE:ESNT) has witnessed falling interest from the aggregate hedge fund industry, we can see that there were a few fund managers that slashed their full holdings in the first quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the biggest position of all the hedgies watched by Insider Monkey, comprising about $24.3 million in stock, and Shawn Bergerson and Martin Kalish’s Waterstone Capital Management was right behind this move, as the fund dumped about $2.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 10 funds in the first quarter.

Let’s go over hedge fund activity in other stocks similar to Essent Group Ltd (NYSE:ESNT). We will take a look at TriNet Group Inc (NYSE:TNET), II-VI, Inc. (NASDAQ:IIVI), Cushman & Wakefield plc (NYSE:CWK), and Coherent, Inc. (NASDAQ:COHR). This group of stocks’ market valuations resemble ESNT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TNET 19 230192 -1
IIVI 20 99773 2
CWK 15 89918 -3
COHR 23 172545 -5
Average 19.25 148107 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $148 million. That figure was $196 million in ESNT’s case. Coherent, Inc. (NASDAQ:COHR) is the most popular stock in this table. On the other hand Cushman & Wakefield plc (NYSE:CWK) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Essent Group Ltd (NYSE:ESNT) 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 ESNT as the stock returned 38.4% 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.