Hedge Funds Are Selling Earthstone Energy, Inc. (ESTE)

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Earthstone Energy, Inc. (NYSE:ESTE) to find out whether there were any major changes in hedge funds’ views.

Is Earthstone Energy, Inc. (NYSE:ESTE) a healthy stock for your portfolio? Hedge funds were taking a pessimistic view. The number of bullish hedge fund bets were trimmed by 3 in recent months. Earthstone Energy, Inc. (NYSE:ESTE) was in 3 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 8. Our calculations also showed that ESTE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 6 hedge funds in our database with ESTE positions at the end of the second quarter.

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 66 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let’s go over the recent hedge fund action surrounding Earthstone Energy, Inc. (NYSE:ESTE).

How have hedgies been trading Earthstone Energy, Inc. (NYSE:ESTE)?

At Q3’s end, a total of 3 of the hedge funds tracked by Insider Monkey were long this stock, a change of -50% from one quarter earlier. By comparison, 8 hedge funds held shares or bullish call options in ESTE a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Earthstone Energy, Inc. (NYSE:ESTE) was held by Solas Capital Management, which reported holding $2.3 million worth of stock at the end of September. It was followed by Royce & Associates with a $1.2 million position. The only other hedge fund that is bullish on the company was Arrowstreet Capital.

Since Earthstone Energy, Inc. (NYSE:ESTE) has experienced declining sentiment from hedge fund managers, we can see that there was a specific group of hedge funds who were dropping their entire stakes by the end of the third quarter. Intriguingly, Israel Englander’s Millennium Management sold off the largest stake of the “upper crust” of funds monitored by Insider Monkey, comprising about $0.3 million in stock. D. E. Shaw’s fund, D E Shaw, also said goodbye to its stock, about $0.1 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 3 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to Earthstone Energy, Inc. (NYSE:ESTE). We will take a look at Team, Inc. (NYSE:TISI), Axcella Health Inc. (NASDAQ:AXLA), Howard Bancorp Inc (NASDAQ:HBMD), Iteris Inc (NASDAQ:ITI), Centennial Resource Development, Inc. (NASDAQ:CDEV), KVH Industries, Inc. (NASDAQ:KVHI), and Tiptree Inc. (NASDAQ:TIPT). This group of stocks’ market values resemble ESTE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TISI 15 45652 3
AXLA 3 672 -2
HBMD 4 11065 -1
ITI 11 19098 -2
CDEV 14 20635 -6
KVHI 4 4825 0
TIPT 3 842 1
Average 7.7 14684 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.7 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $4 million in ESTE’s case. Team, Inc. (NYSE:TISI) is the most popular stock in this table. On the other hand Axcella Health Inc. (NASDAQ:AXLA) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Earthstone Energy, Inc. (NYSE:ESTE) is even less popular than AXLA. Our overall hedge fund sentiment score for ESTE is 13.3. 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. Hedge funds clearly dropped the ball on ESTE as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 28.1% in 2020 through November 23rd and still beat the market by 15.4 percentage points. A small number of hedge funds were also right about betting on ESTE as the stock returned 45.2% since Q3 (through November 23rd) and outperformed the market by an even larger margin.

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