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Hedge Funds Are Crazy About ESCO Technologies Inc. (ESE)

Billionaire hedge fund managers such as Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.

Is ESCO Technologies Inc. (NYSE:ESE) a good investment now? Money managers are becoming more confident. The number of bullish hedge fund bets inched up by 3 lately. Our calculations also showed that ESE isn’t among the 30 most popular stocks among hedge funds. ESE was in 6 hedge funds’ portfolios at the end of the third quarter of 2018. There were 3 hedge funds in our database with ESE positions at the end of the previous quarter.

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 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.

CITADEL INVESTMENT GROUP

We’re going to take a glance at the fresh hedge fund action encompassing ESCO Technologies Inc. (NYSE:ESE).

Hedge fund activity in ESCO Technologies Inc. (NYSE:ESE)

At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 100% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ESE over the last 13 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ESE Positions

Among these funds, Millennium Management held the most valuable stake in ESCO Technologies Inc. (NYSE:ESE), which was worth $3.4 million at the end of the third quarter. On the second spot was Marshall Wace LLP which amassed $1.6 million worth of shares. Moreover, Citadel Investment Group, Holocene Advisors, and D E Shaw were also bullish on ESCO Technologies Inc. (NYSE:ESE), allocating a large percentage of their portfolios to this stock.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Millennium Management, managed by Israel Englander, assembled the most valuable position in ESCO Technologies Inc. (NYSE:ESE). Millennium Management had $3.4 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $1.6 million position during the quarter. The other funds with brand new ESE positions are Brandon Haley’s Holocene Advisors and D. E. Shaw’s D E Shaw.

Let’s go over hedge fund activity in other stocks similar to ESCO Technologies Inc. (NYSE:ESE). We will take a look at Fanhua Inc. (NASDAQ:FANH), Portola Pharmaceuticals Inc (NASDAQ:PTLA), Alexander’s, Inc. (NYSE:ALX), and Arch Coal, Inc. (NYSE:ARCH). This group of stocks’ market values are closest to ESE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FANH 4 9984 -1
PTLA 23 455027 5
ALX 8 57013 1
ARCH 26 379048 2
Average 15.25 225268 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $225 million. That figure was $6 million in ESE’s case. Arch Coal, Inc. (NYSE:ARCH) is the most popular stock in this table. On the other hand Fanhua Inc. (NASDAQ:FANH) is the least popular one with only 4 bullish hedge fund positions. ESCO Technologies Inc. (NYSE:ESE) 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 ARCH might be a better candidate to consider a long position.

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

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