EnPro Industries, Inc. (NPO): Hedge Funds Misjudged This Stock?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds’ top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like EnPro Industries, Inc. (NYSE:NPO).

Is EnPro Industries, Inc. (NYSE:NPO) undervalued? The smart money is getting less optimistic. The number of bullish hedge fund positions were trimmed by 6 recently. Our calculations also showed that NPO isn’t among the 30 most popular stocks among hedge funds (see the video below). NPO was in 11 hedge funds’ portfolios at the end of June. There were 17 hedge funds in our database with NPO holdings at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

GAMCO Investors, Mario Gabelli

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s analyze the latest hedge fund action encompassing EnPro Industries, Inc. (NYSE:NPO).

Hedge fund activity in EnPro Industries, Inc. (NYSE:NPO)

At Q2’s end, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -35% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in NPO over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with NPO Positions

More specifically, GAMCO Investors was the largest shareholder of EnPro Industries, Inc. (NYSE:NPO), with a stake worth $87.6 million reported as of the end of March. Trailing GAMCO Investors was GLG Partners, which amassed a stake valued at $15.3 million. Marshall Wace LLP, Citadel Investment Group, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as EnPro Industries, Inc. (NYSE:NPO) has experienced bearish sentiment from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedge funds that decided to sell off their positions entirely heading into Q3. It’s worth mentioning that Mariko Gordon’s Daruma Asset Management dropped the largest position of all the hedgies tracked by Insider Monkey, worth an estimated $26.1 million in stock. Paul Tudor Jones’s fund, Tudor Investment Corp, also dropped its stock, about $0.6 million worth. These moves are important to note, as aggregate hedge fund interest fell by 6 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to EnPro Industries, Inc. (NYSE:NPO). These stocks are Raven Industries, Inc. (NASDAQ:RAVN), NextGen Healthcare, Inc. (NASDAQ:NXGN), Seacoast Banking Corporation of Florida (NASDAQ:SBCF), and TPG Specialty Lending Inc (NYSE:TSLX). This group of stocks’ market valuations are closest to NPO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RAVN 12 106797 1
NXGN 14 46230 1
SBCF 6 42244 -2
TSLX 10 61496 -2
Average 10.5 64192 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $64 million. That figure was $123 million in NPO’s case. NextGen Healthcare, Inc. (NASDAQ:NXGN) is the most popular stock in this table. On the other hand Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is the least popular one with only 6 bullish hedge fund positions. EnPro Industries, Inc. (NYSE:NPO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on NPO as the stock returned 8% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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