Element Solutions Inc. (ESI): Hedge Fund Interest Inching Up

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Element Solutions Inc. (NYSE:ESI) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

Element Solutions Inc. (NYSE:ESI) shareholders have witnessed an increase in support from the world’s most elite money managers lately. Element Solutions Inc. (NYSE:ESI) was in 37 hedge funds’ portfolios at the end of June. The all time high for this statistics is 40. Our calculations also showed that ESI isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind we’re going to view the new hedge fund action regarding Element Solutions Inc. (NYSE:ESI).

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

Heading into the third quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards ESI over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ESI A Good Stock To Buy?

The largest stake in Element Solutions Inc. (NYSE:ESI) was held by Gates Capital Management, which reported holding $105.8 million worth of stock at the end of September. It was followed by Glenview Capital with a $34.7 million position. Other investors bullish on the company included MIC Capital Partners, Arrowstreet Capital, and Scoggin. In terms of the portfolio weights assigned to each position MIC Capital Partners allocated the biggest weight to Element Solutions Inc. (NYSE:ESI), around 13.94% of its 13F portfolio. Scoggin is also relatively very bullish on the stock, dishing out 6.7 percent of its 13F equity portfolio to ESI.

Now, key hedge funds were leading the bulls’ herd. Albar Capital, managed by Javier Velazquez, established the most valuable position in Element Solutions Inc. (NYSE:ESI). Albar Capital had $11.2 million invested in the company at the end of the quarter. Mark Coe’s Intrinsic Edge Capital also made a $8.8 million investment in the stock during the quarter. The other funds with brand new ESI positions are  Renaissance Technologies, David Harding’s Winton Capital Management, and Benjamin A. Smith’s Laurion Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Element Solutions Inc. (NYSE:ESI). We will take a look at 21Vianet Group Inc (NASDAQ:VNET), Equinox Gold Corp. (NYSE:EQX), Turning Point Therapeutics, Inc. (NASDAQ:TPTX), Amarin Corporation plc (NASDAQ:AMRN), Macquarie Infrastructure Corporation (NYSE:MIC), Itron, Inc. (NASDAQ:ITRI), and AllianceBernstein Holding LP (NYSE:AB). This group of stocks’ market valuations match ESI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VNET 19 266431 4
EQX 14 122841 7
TPTX 30 524757 11
AMRN 32 477249 -7
MIC 38 564202 8
ITRI 13 300874 -6
AB 7 23909 0
Average 21.9 325752 2.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.9 hedge funds with bullish positions and the average amount invested in these stocks was $326 million. That figure was $412 million in ESI’s case. Macquarie Infrastructure Corporation (NYSE:MIC) is the most popular stock in this table. On the other hand AllianceBernstein Holding LP (NYSE:AB) is the least popular one with only 7 bullish hedge fund positions. Element Solutions Inc. (NYSE:ESI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ESI is 83.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately ESI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ESI were disappointed as the stock returned -0.9% 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.