Encompass Health Corporation (EHC): Are Hedge Funds Right About This Stock?

Is Encompass Health Corporation (NYSE:EHC) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before doing days of research on it. Given their 2 and 20 payment structure, hedge funds have more resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Encompass Health Corporation (NYSE:EHC) was in 25 hedge funds’ portfolios at the end of the third quarter of 2018. EHC has experienced an increase in activity from the world’s largest hedge funds of late. There were 22 hedge funds in our database with EHC positions at the end of the previous quarter. Our calculations also showed that EHC isn’t among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.

Kris Jenner - Rock Springs Capital

Let’s go over the fresh hedge fund action surrounding Encompass Health Corporation (NYSE:EHC).

How have hedgies been trading Encompass Health Corporation (NYSE:EHC)?

At Q3’s end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the second quarter of 2018. On the other hand, there were a total of 16 hedge funds with a bullish position in EHC at the beginning of this year. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).


More specifically, Renaissance Technologies was the largest shareholder of Encompass Health Corporation (NYSE:EHC), with a stake worth $116.7 million reported as of the end of September. Trailing Renaissance Technologies was Rock Springs Capital Management, which amassed a stake valued at $52.7 million. Millennium Management, Daruma Asset Management, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Now, some big names have jumped into Encompass Health Corporation (NYSE:EHC) headfirst. HBK Investments, managed by David Costen Haley, established the most valuable position in Encompass Health Corporation (NYSE:EHC). HBK Investments had $3.6 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also made a $2.7 million investment in the stock during the quarter. The other funds with brand new EHC positions are Alec Litowitz and Ross Laser’s Magnetar Capital, Mike Vranos’s Ellington, and Andre F. Perold’s HighVista Strategies.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Encompass Health Corporation (NYSE:EHC) but similarly valued. We will take a look at News Corp (NASDAQ:NWSA), Lamar Advertising Company (REIT) (NASDAQ:LAMR), Okta, Inc. (NASDAQ:OKTA), and Whirlpool Corporation (NYSE:WHR). 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
NWSA 30 712120 5
LAMR 19 310683 1
OKTA 32 601342 5
WHR 23 586011 -1
Average 26 552539 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $553 million. That figure was $401 million in EHC’s case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand Lamar Advertising Company (REIT) (NASDAQ:LAMR) is the least popular one with only 19 bullish hedge fund positions. Encompass Health Corporation (NYSE:EHC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard OKTA might be a better candidate to consider a long position.

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