At Insider Monkey, we pore over the filings of nearly 817 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of September 30. In this article, we will use that wealth of knowledge to determine whether or not Element Solutions Inc. (NYSE:ESI) makes for a good investment right now.
Is ESI a good stock to buy now? Money managers were getting less optimistic. The number of bullish hedge fund bets retreated by 2 lately. Element Solutions Inc. (NYSE:ESI) was in 35 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 40. Our calculations also showed that ESI 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.
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 check out the fresh hedge fund action regarding Element Solutions Inc. (NYSE:ESI).
Do Hedge Funds Think ESI Is A Good Stock To Buy Now?
At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in ESI over the last 21 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, Gates Capital Management held the most valuable stake in Element Solutions Inc. (NYSE:ESI), which was worth $130.3 million at the end of the third quarter. On the second spot was MIC Capital Partners which amassed $32 million worth of shares. Locust Wood Capital Advisers, Arrowstreet Capital, and Glenview Capital 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 Scoggin allocated the biggest weight to Element Solutions Inc. (NYSE:ESI), around 9.81% of its 13F portfolio. MIC Capital Partners is also relatively very bullish on the stock, earmarking 9.36 percent of its 13F equity portfolio to ESI.
Because Element Solutions Inc. (NYSE:ESI) has witnessed a decline in interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of money managers that decided to sell off their full holdings in the third quarter. Intriguingly, Ken Griffin’s Citadel Investment Group sold off the largest position of all the hedgies tracked by Insider Monkey, totaling an estimated $2.7 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also cut its stock, about $2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 2 funds in the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Element Solutions Inc. (NYSE:ESI) but similarly valued. We will take a look at AllianceBernstein Holding LP (NYSE:AB), New Jersey Resources Corp (NYSE:NJR), STAAR Surgical Company (NASDAQ:STAA), WD-40 Company (NASDAQ:WDFC), Sunnova Energy International Inc. (NYSE:NOVA), Tenet Healthcare Corp (NYSE:THC), and ShockWave Medical, Inc. (NASDAQ:SWAV). All of these stocks’ market caps resemble ESI’s market cap.
|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 17.4 hedge funds with bullish positions and the average amount invested in these stocks was $344 million. That figure was $415 million in ESI’s case. Tenet Healthcare Corp (NYSE:THC) is the most popular stock in this table. On the other hand AllianceBernstein Holding LP (NYSE:AB) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Element Solutions Inc. (NYSE:ESI) is more popular among hedge funds. Our overall hedge fund sentiment score for ESI is 79.3. 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. 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 returned 33.3% in 2020 through December 18th but still managed to beat the market by 16.4 percentage points. Hedge funds were also right about betting on ESI as the stock returned 71.2% since the end of September (through 12/18) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.