Is ESTC A Good Stock To Buy Now?

While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Elastic N.V. (NYSE:ESTC).

Is ESTC a good stock to buy now? The smart money was in a pessimistic mood. The number of long hedge fund bets were trimmed by 7 lately. Elastic N.V. (NYSE:ESTC) was in 36 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 43. Our calculations also showed that ESTC 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.

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 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.

Chase Coleman of Tiger Global

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. Now let’s take a gander at the recent hedge fund action encompassing Elastic N.V. (NYSE:ESTC).

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

At the end of September, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the previous quarter. On the other hand, there were a total of 31 hedge funds with a bullish position in ESTC 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.

More specifically, Sylebra Capital Management was the largest shareholder of Elastic N.V. (NYSE:ESTC), with a stake worth $530.1 million reported as of the end of September. Trailing Sylebra Capital Management was Tiger Global Management LLC, which amassed a stake valued at $433.7 million. Bloom Tree Partners, Renaissance Technologies, and Marcho Partners 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 Sylebra Capital Management allocated the biggest weight to Elastic N.V. (NYSE:ESTC), around 16.29% of its 13F portfolio. Greenhaven Road Investment Management is also relatively very bullish on the stock, setting aside 11.65 percent of its 13F equity portfolio to ESTC.

Judging by the fact that Elastic N.V. (NYSE:ESTC) has faced falling interest from the smart money, logic holds that there exists a select few fund managers that slashed their entire stakes by the end of the third quarter. It’s worth mentioning that Daniel Sundheim’s D1 Capital Partners sold off the largest position of all the hedgies followed by Insider Monkey, worth an estimated $64.4 million in stock. Panayotis Takis Sparaggis’s fund, Alkeon Capital Management, also cut its stock, about $40.2 million worth. These transactions are interesting, as total hedge fund interest was cut by 7 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to Elastic N.V. (NYSE:ESTC). We will take a look at Galapagos NV (NASDAQ:GLPG), Vistra Corp. (NYSE:VST), Quidel Corporation (NASDAQ:QDEL), Bright Horizons Family Solutions Inc (NYSE:BFAM), Carnival Corporation & plc (NYSE:CUK), Chegg Inc (NYSE:CHGG), and Fidelity National Financial Inc (NYSE:FNF). This group of stocks’ market valuations match ESTC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GLPG 11 97309 -2
VST 45 1514450 3
QDEL 42 467265 10
BFAM 26 314357 -4
CUK 13 142847 -1
CHGG 42 838532 -3
FNF 44 1065923 -3
Average 31.9 634383 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.9 hedge funds with bullish positions and the average amount invested in these stocks was $634 million. That figure was $1457 million in ESTC’s case. Vistra Corp. (NYSE:VST) is the most popular stock in this table. On the other hand Galapagos NV (NASDAQ:GLPG) is the least popular one with only 11 bullish hedge fund positions. Elastic N.V. (NYSE:ESTC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ESTC is 59.9. 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 gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on ESTC as the stock returned 42.3% since the end of Q3 (through 12/18) 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.