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Hedge Funds Are Done Buying Encompass Health Corporation (EHC)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Encompass Health Corporation (NYSE:EHC) based on that data and determine whether they were really smart about the stock.

Encompass Health Corporation (NYSE:EHC) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 33 hedge funds’ portfolios at the end of June. Our calculations also showed that EHC 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). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as ADT Inc. (NYSE:ADT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), and Zai Lab Limited (NASDAQ:ZLAB) to gather more data points. Our calculations also showed that EHC 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.

Steven Cohen

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. 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 take a look at the key hedge fund action encompassing Encompass Health Corporation (NYSE:EHC).

What does smart money think about Encompass Health Corporation (NYSE:EHC)?

At second quarter’s end, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in EHC over the last 20 quarters. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Is EHC A Good Stock To Buy?

Among these funds, Viking Global held the most valuable stake in Encompass Health Corporation (NYSE:EHC), which was worth $165.8 million at the end of the third quarter. On the second spot was Healthcor Management LP which amassed $77.2 million worth of shares. Rock Springs Capital Management, Two Sigma Advisors, and Millennium Management 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 Iron Triangle Partners allocated the biggest weight to Encompass Health Corporation (NYSE:EHC), around 8.58% of its 13F portfolio. Healthcor Management LP is also relatively very bullish on the stock, dishing out 3.23 percent of its 13F equity portfolio to EHC.

Because Encompass Health Corporation (NYSE:EHC) has experienced bearish sentiment from the smart money, it’s safe to say that there were a few fund managers that slashed their positions entirely heading into Q3. At the top of the heap, Steve Cohen’s Point72 Asset Management dropped the largest position of the 750 funds watched by Insider Monkey, comprising an estimated $43.6 million in stock. Krishen Sud’s fund, Sivik Global Healthcare, also said goodbye to its stock, about $7.7 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out 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 ADT Inc. (NYSE:ADT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), Zai Lab Limited (NASDAQ:ZLAB), Jazz Pharmaceuticals Plc (NASDAQ:JAZZ), Ares Capital Corporation (NASDAQ:ARCC), National Retail Properties, Inc. (NYSE:NNN), and Lumentum Holdings Inc (NASDAQ:LITE). This group of 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
ADT 20 207319 0
ADPT 28 2690388 10
ZLAB 27 416774 5
JAZZ 34 1164286 5
ARCC 19 150961 -7
NNN 17 86331 -2
LITE 42 678388 8
Average 26.7 770635 2.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $771 million. That figure was $499 million in EHC’s case. Lumentum Holdings Inc (NASDAQ:LITE) is the most popular stock in this table. On the other hand National Retail Properties, Inc. (NYSE:NNN) is the least popular one with only 17 bullish hedge fund positions. Encompass Health Corporation (NYSE:EHC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for EHC is 67. 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 EHC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EHC were disappointed as the stock returned 5.3% 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.