Is ESE A Good Stock To Buy Now?

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of September. At Insider Monkey, we follow nearly 817 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is ESCO Technologies Inc. (NYSE:ESE), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is ESE a good stock to buy now? Investors who are in the know were becoming more confident. The number of long hedge fund bets increased by 7 recently. ESCO Technologies Inc. (NYSE:ESE) was in 14 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 9. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ESE 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

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. Keeping this in mind let’s take a look at the fresh hedge fund action regarding ESCO Technologies Inc. (NYSE:ESE).

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

At Q3’s end, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 100% from one quarter earlier. On the other hand, there were a total of 8 hedge funds with a bullish position in ESE a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in ESCO Technologies Inc. (NYSE:ESE) was held by Royce & Associates, which reported holding $38.6 million worth of stock at the end of September. It was followed by Cardinal Capital with a $21.7 million position. Other investors bullish on the company included Running Oak Capital, Arrowstreet Capital, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Running Oak Capital allocated the biggest weight to ESCO Technologies Inc. (NYSE:ESE), around 1.57% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, earmarking 0.9 percent of its 13F equity portfolio to ESE.

Now, some big names have jumped into ESCO Technologies Inc. (NYSE:ESE) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the biggest position in ESCO Technologies Inc. (NYSE:ESE). Arrowstreet Capital had $2.4 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $1.4 million investment in the stock during the quarter. The other funds with brand new ESE positions are Paul Tudor Jones’s Tudor Investment Corp, Donald Sussman’s Paloma Partners, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as ESCO Technologies Inc. (NYSE:ESE) but similarly valued. We will take a look at Upwork Inc. (NASDAQ:UPWK), First Majestic Silver Corp (NYSE:AG), Kennedy-Wilson Holdings Inc (NYSE:KW), Brady Corp (NYSE:BRC), Moog Inc (NYSE:MOG), Arconic Corporation (NYSE:ARNC), and The Brink’s Company (NYSE:BCO). This group of stocks’ market values match ESE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UPWK 27 294152 2
AG 14 52631 0
KW 18 346851 4
BRC 19 139850 2
MOG 19 111492 -4
ARNC 21 633163 5
BCO 28 301172 3
Average 20.9 268473 1.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.9 hedge funds with bullish positions and the average amount invested in these stocks was $268 million. That figure was $75 million in ESE’s case. The Brink’s Company (NYSE:BCO) is the most popular stock in this table. On the other hand First Majestic Silver Corp (NYSE:AG) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks ESCO Technologies Inc. (NYSE:ESE) is even less popular than AG. Our overall hedge fund sentiment score for ESE is 40. 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 ESE 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 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on ESE as the stock returned 24.7% since Q3 (through December 8th) and outperformed the market by an even larger margin.

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