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Hedge Fund Consensus Stocks vs. E*TRADE Financial Corporation (ETFC) In 2019

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in E*TRADE Financial Corporation (NASDAQ:ETFC).

E*TRADE Financial Corporation (NASDAQ:ETFC) was in 39 hedge funds’ portfolios at the end of September. ETFC has experienced a decrease in hedge fund sentiment of late. There were 43 hedge funds in our database with ETFC positions at the end of the previous quarter. Our calculations also showed that ETFC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a glance at the new hedge fund action surrounding E*TRADE Financial Corporation (NASDAQ:ETFC).

How are hedge funds trading E*TRADE Financial Corporation (NASDAQ:ETFC)?

At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. On the other hand, there were a total of 36 hedge funds with a bullish position in ETFC 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.

Is ETFC A Good Stock To Buy?

More specifically, D E Shaw was the largest shareholder of E*TRADE Financial Corporation (NASDAQ:ETFC), with a stake worth $142.7 million reported as of the end of September. Trailing D E Shaw was Citadel Investment Group, which amassed a stake valued at $123.2 million. Millennium Management, Arrowstreet Capital, and Southpoint Capital Advisors 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 Toscafund Asset Management allocated the biggest weight to E*TRADE Financial Corporation (NASDAQ:ETFC), around 41.66% of its 13F portfolio. BlueMar Capital Management is also relatively very bullish on the stock, setting aside 3.15 percent of its 13F equity portfolio to ETFC.

Because E*TRADE Financial Corporation (NASDAQ:ETFC) has faced a decline in interest from the smart money, we can see that there was a specific group of fund managers that slashed their entire stakes by the end of the third quarter. At the top of the heap, David Costen Haley’s HBK Investments dumped the largest stake of the 750 funds followed by Insider Monkey, comprising close to $44.6 million in stock, and David Costen Haley’s HBK Investments was right behind this move, as the fund cut about $22.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 4 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as E*TRADE Financial Corporation (NASDAQ:ETFC) but similarly valued. We will take a look at West Pharmaceutical Services Inc. (NYSE:WST), Globe Life Inc. (NYSE:GL), VICI Properties Inc. (NYSE:VICI), and RingCentral Inc (NYSE:RNG). This group of stocks’ market caps match ETFC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WST 30 494330 6
GL 19 828753 0
VICI 37 2262889 -22
RNG 48 1615607 3
Average 33.5 1300395 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.5 hedge funds with bullish positions and the average amount invested in these stocks was $1300 million. That figure was $875 million in ETFC’s case. RingCentral Inc (NYSE:RNG) is the most popular stock in this table. On the other hand Globe Life Inc. (NYSE:GL) is the least popular one with only 19 bullish hedge fund positions. E*TRADE Financial Corporation (NASDAQ:ETFC) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately ETFC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ETFC were disappointed as the stock returned 5.5% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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