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Hedge Funds Souring On E*TRADE Financial (ETFC)

In this article we will check out the progression of hedge fund sentiment towards E*TRADE Financial Corporation (NASDAQ:ETFC) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

E*TRADE Financial Corporation (NASDAQ:ETFC) investors should pay attention to a decrease in enthusiasm from smart money lately. ETFC was in 37 hedge funds’ portfolios at the end of the first quarter of 2020. There were 48 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 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.

In the financial world there are tons of gauges investors can use to size up publicly traded companies. A couple of the best gauges are hedge fund and insider trading interest. Our researchers have shown that, historically, those who follow the best picks of the best investment managers can outpace their index-focused peers by a very impressive amount (see the details here).

Clint Carlson of Carlson Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a gander at the new hedge fund action encompassing E*TRADE Financial Corporation (NASDAQ:ETFC).

How have hedgies been trading E*TRADE Financial Corporation (NASDAQ:ETFC)?

At the end of the first quarter, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ETFC over the last 18 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, D E Shaw held the most valuable stake in E*TRADE Financial Corporation (NASDAQ:ETFC), which was worth $137 million at the end of the third quarter. On the second spot was Magnetar Capital which amassed $122.5 million worth of shares. Omni Partners, Balyasny Asset Management, and Alpine Associates 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 Omni Partners allocated the biggest weight to E*TRADE Financial Corporation (NASDAQ:ETFC), around 8.85% of its 13F portfolio. One Fin Capital Management is also relatively very bullish on the stock, dishing out 5.46 percent of its 13F equity portfolio to ETFC.

Judging by the fact that E*TRADE Financial Corporation (NASDAQ:ETFC) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of funds who were dropping their entire stakes heading into Q4. At the top of the heap, John Smith Clark’s Southpoint Capital Advisors said goodbye to the largest investment of all the hedgies monitored by Insider Monkey, worth close to $93 million in stock, and James Parsons’s Junto Capital Management was right behind this move, as the fund cut about $40.8 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 11 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to E*TRADE Financial Corporation (NASDAQ:ETFC). We will take a look at Dropbox, Inc. (NASDAQ:DBX), CNH Industrial NV (NYSE:CNHI), The Carlyle Group Inc. (NASDAQ:CG), and Zillow Group Inc (NASDAQ:Z). This group of stocks’ market valuations are similar to ETFC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DBX 44 985316 -2
CNHI 17 156917 1
CG 16 232286 3
Z 37 1368913 0
Average 28.5 685858 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $686 million. That figure was $942 million in ETFC’s case. Dropbox, Inc. (NASDAQ:DBX) is the most popular stock in this table. On the other hand The Carlyle Group Inc. (NASDAQ:CG) is the least popular one with only 16 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. 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 8.3% in 2020 through the end of May but still beat the market by 13.2 percentage points. Hedge funds were also right about betting on ETFC as the stock returned 33.1% in Q2 (through the end of May) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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