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Hedge Funds Souring On ESCO Technologies Inc. (ESE)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of ESCO Technologies Inc. (NYSE:ESE).

ESCO Technologies Inc. (NYSE:ESE) shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. ESE was in 8 hedge funds’ portfolios at the end of the first quarter of 2020. There were 9 hedge funds in our database with ESE holdings at the end of the previous quarter. Our calculations also showed that ESE isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a glance at the recent hedge fund action encompassing ESCO Technologies Inc. (NYSE:ESE).

What does smart money think about ESCO Technologies Inc. (NYSE:ESE)?

At the end of the first quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ESE over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ESE A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the number one position in ESCO Technologies Inc. (NYSE:ESE). Royce & Associates has a $33.9 million position in the stock, comprising 0.5% of its 13F portfolio. The second largest stake is held by Cardinal Capital, led by Amy Minella, holding a $21.7 million position; 1.1% of its 13F portfolio is allocated to the company. Some other peers that hold long positions encompass Noam Gottesman’s GLG Partners, Cliff Asness’s AQR Capital Management and Joel Greenblatt’s Gotham Asset Management. In terms of the portfolio weights assigned to each position Cardinal Capital allocated the biggest weight to ESCO Technologies Inc. (NYSE:ESE), around 1.07% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.46 percent of its 13F equity portfolio to ESE.

Judging by the fact that ESCO Technologies Inc. (NYSE:ESE) has witnessed a decline in interest from the smart money, we can see that there exists a select few money managers that slashed their positions entirely heading into Q4. At the top of the heap, Robert Joseph Caruso’s Select Equity Group said goodbye to the biggest investment of the 750 funds monitored by Insider Monkey, worth close to $6.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund sold off about $3.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as ESCO Technologies Inc. (NYSE:ESE) but similarly valued. These stocks are South State Corporation (NASDAQ:SSB), Alamos Gold Inc (NYSE:AGI), Washington Real Estate Investment Trust (NYSE:WRE), and Synaptics Incorporated (NASDAQ:SYNA). This group of stocks’ market caps are similar to ESE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SSB 12 77340 -3
AGI 19 234083 3
WRE 5 90460 -4
SYNA 26 345715 0
Average 15.5 186900 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $187 million. That figure was $60 million in ESE’s case. Synaptics Incorporated (NASDAQ:SYNA) is the most popular stock in this table. On the other hand Washington Real Estate Investment Trust (NYSE:WRE) is the least popular one with only 5 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. 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 12.2% in 2020 through June 17th and surpassed the market by 14.8 percentage points. Unfortunately ESE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ESE investors were disappointed as the stock returned 8.6% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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