Is ELAN A Good Stock To Buy According To Hedge Funds?

In this article we are going to use hedge fund sentiment as a tool and determine whether Elanco Animal Health Incorporated (NYSE:ELAN) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is ELAN a good stock to buy now? Elanco Animal Health Incorporated (NYSE:ELAN) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. Elanco Animal Health Incorporated (NYSE:ELAN) was in 21 hedge funds’ portfolios at the end of September. The all time high for this statistic is 36. There were 30 hedge funds in our database with ELAN positions at the end of the second quarter. Our calculations also showed that ELAN 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

To most traders, hedge funds are assumed to be worthless, old investment tools of the past. While there are more than 8000 funds trading at present, Our experts hone in on the masters of this club, approximately 850 funds. These money managers have their hands on the lion’s share of all hedge funds’ total capital, and by shadowing their inimitable stock picks, Insider Monkey has come up with a few investment strategies that have historically outperformed the broader indices. Insider Monkey’s flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 13% since February 2017 (through November 17th) even though the market was up 65% during the same period. We just shared a list of 6 short targets in our latest quarterly update .

Scott Ferguson Sachem Head Capital

Scott Ferguson of Sachem Head 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 15 best blue chip stocks 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. With all of this in mind we’re going to take a look at the new hedge fund action surrounding Elanco Animal Health Incorporated (NYSE:ELAN).

Do Hedge Funds Think ELAN Is A Good Stock To Buy Now?

Heading into the fourth quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the second quarter of 2020. On the other hand, there were a total of 27 hedge funds with a bullish position in ELAN a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Sachem Head Capital, managed by Scott Ferguson, holds the biggest position in Elanco Animal Health Incorporated (NYSE:ELAN). Sachem Head Capital has a $97.8 million position in the stock, comprising 5.9% of its 13F portfolio. The second largest stake is held by Segantii Capital, managed by Simon Sadler, which holds a $51.7 million position; 4% of its 13F portfolio is allocated to the company. Remaining members of the smart money that are bullish comprise Doug Silverman and Alexander Klabin’s Senator Investment Group, Eli Cohen’s Crescent Park Management and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Sachem Head Capital allocated the biggest weight to Elanco Animal Health Incorporated (NYSE:ELAN), around 5.93% of its 13F portfolio. Crescent Park Management is also relatively very bullish on the stock, dishing out 5.28 percent of its 13F equity portfolio to ELAN.

Due to the fact that Elanco Animal Health Incorporated (NYSE:ELAN) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedge funds that slashed their entire stakes last quarter. Intriguingly, Brandon Haley’s Holocene Advisors dropped the largest stake of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $29.1 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dropped its stock, about $23.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 9 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Elanco Animal Health Incorporated (NYSE:ELAN). We will take a look at Tradeweb Markets Inc. (NASDAQ:TW), The J.M. Smucker Company (NYSE:SJM), Darden Restaurants, Inc. (NYSE:DRI), International Flavors & Fragrances Inc (NYSE:IFF), Essex Property Trust Inc (NYSE:ESS), Logitech International SA (NASDAQ:LOGI), and 10x Genomics, Inc. (NASDAQ:TXG). This group of stocks’ market values are similar to ELAN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TW 24 297199 -9
SJM 31 763149 -7
DRI 41 1183411 -8
IFF 31 202593 0
ESS 28 549766 0
LOGI 15 406297 2
TXG 31 527141 12
Average 28.7 561365 -1.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.7 hedge funds with bullish positions and the average amount invested in these stocks was $561 million. That figure was $303 million in ELAN’s case. Darden Restaurants, Inc. (NYSE:DRI) is the most popular stock in this table. On the other hand Logitech International SA (NASDAQ:LOGI) is the least popular one with only 15 bullish hedge fund positions. Elanco Animal Health Incorporated (NYSE:ELAN) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ELAN is 25. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 30.7% in 2020 through December 14th and surpassed the market again by 15.8 percentage points. Unfortunately ELAN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ELAN investors were disappointed as the stock returned 2.8% since the end of September (through 12/14) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 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.