In this article we are going to use hedge fund sentiment as a tool and determine whether The Eastern Company (NASDAQ:EML) 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 The Eastern Company (EML) a good stock to buy now? EML shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds’ portfolios at the end of the third quarter of 2020. Our calculations also showed that EML 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). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as 1st Constitution Bancorp (NASDAQ:FCCY), Washington Prime Group Inc. (NYSE:WPG), and Level One Bancorp, Inc. (NASDAQ:LEVL) to gather more data points.
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.
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 we’re going to analyze the key hedge fund action encompassing The Eastern Company (NASDAQ:EML).
Hedge fund activity in The Eastern Company (NASDAQ:EML)
At third quarter’s end, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in EML over the last 21 quarters. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
The largest stake in The Eastern Company (NASDAQ:EML) was held by Barington Capital Group, which reported holding $11.3 million worth of stock at the end of September. It was followed by GAMCO Investors with a $10.7 million position. Other investors bullish on the company included Minerva Advisors, Renaissance Technologies, and Ancora Advisors. In terms of the portfolio weights assigned to each position Barington Capital Group allocated the biggest weight to The Eastern Company (NASDAQ:EML), around 19.79% of its 13F portfolio. Minerva Advisors is also relatively very bullish on the stock, earmarking 4.28 percent of its 13F equity portfolio to EML.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s check out hedge fund activity in other stocks similar to The Eastern Company (NASDAQ:EML). These stocks are 1st Constitution Bancorp (NASDAQ:FCCY), Washington Prime Group Inc. (NYSE:WPG), Level One Bancorp, Inc. (NASDAQ:LEVL), Oconee Federal Financial Corp. (NASDAQ:OFED), Lazydays Holdings, Inc. (NASDAQ:LAZY), Eagle Bancorp Montana Inc (NASDAQ:EBMT), and Asure Software Inc (NASDAQ:ASUR). This group of stocks’ market valuations are closest to EML’s market valuation.
|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 4.4 hedge funds with bullish positions and the average amount invested in these stocks was $7 million. That figure was $34 million in EML’s case. Washington Prime Group Inc. (NYSE:WPG) is the most popular stock in this table. On the other hand 1st Constitution Bancorp (NASDAQ:FCCY) is the least popular one with only 2 bullish hedge fund positions. The Eastern Company (NASDAQ:EML) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for EML is 51.4. 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 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. Hedge funds were also right about betting on EML as the stock returned 15.8% since the end of Q3 (through 11/27) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.