How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Ellington Financial Inc. (NYSE:EFC) and determine whether hedge funds had an edge regarding this stock.
Is Ellington Financial Inc. (NYSE:EFC) worth your attention right now? The smart money was in a pessimistic mood. The number of long hedge fund positions shrunk by 1 recently. Our calculations also showed that EFC 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.
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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 let’s review the latest hedge fund action surrounding Ellington Financial Inc. (NYSE:EFC).
What have hedge funds been doing with Ellington Financial Inc. (NYSE:EFC)?
At Q1’s end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards EFC over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Israel Englander’s Millennium Management has the most valuable position in Ellington Financial Inc. (NYSE:EFC), worth close to $5.5 million, accounting for less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is Leon Cooperman of Omega Advisors, with a $5.5 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism consist of Mike Vranos’s Ellington, Dmitry Balyasny’s Balyasny Asset Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Ellington allocated the biggest weight to Ellington Financial Inc. (NYSE:EFC), around 1.14% of its 13F portfolio. Omega Advisors is also relatively very bullish on the stock, dishing out 0.71 percent of its 13F equity portfolio to EFC.
Because Ellington Financial Inc. (NYSE:EFC) has witnessed bearish sentiment from the smart money, we can see that there was a specific group of funds who sold off their positions entirely in the first quarter. It’s worth mentioning that Paul Marshall and Ian Wace’s Marshall Wace LLP cut the largest stake of the “upper crust” of funds monitored by Insider Monkey, worth about $14.4 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund dumped about $1.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds in the first quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ellington Financial Inc. (NYSE:EFC) but similarly valued. We will take a look at ProPetro Holding Corp. (NYSE:PUMP), Matrix Service Co (NASDAQ:MTRX), Leju Holdings Ltd (NYSE:LEJU), and Corenergy Infrastructure Trust Inc (NYSE:CORR). This group of stocks’ market values are closest to EFC’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $18 million. That figure was $20 million in EFC’s case. Matrix Service Co (NASDAQ:MTRX) is the most popular stock in this table. On the other hand Leju Holdings Ltd (NYSE:LEJU) is the least popular one with only 1 bullish hedge fund positions. Ellington Financial Inc. (NYSE:EFC) 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on EFC as the stock returned 111.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.