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Should I Avoid E*TRADE Financial Corporation (ETFC)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded E*TRADE Financial Corporation (NASDAQ:ETFC) and determine whether the smart money was really smart about this stock.

Is E*TRADE Financial Corporation (NASDAQ:ETFC) undervalued? Hedge funds were becoming less hopeful. The number of bullish hedge fund bets decreased by 1 recently. E*TRADE Financial Corporation (NASDAQ:ETFC) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 54. Our calculations also showed that ETFC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 37 hedge funds in our database with ETFC holdings at the end of March.

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.

Paul Glazer of Glazer Capital

Paul Glazer of Glazer Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Now let’s check out the new hedge fund action regarding E*TRADE Financial Corporation (NASDAQ:ETFC).

Hedge fund activity in E*TRADE Financial Corporation (NASDAQ:ETFC)

At the end of June, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from one quarter earlier. By comparison, 43 hedge funds held shares or bullish call options in ETFC a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in E*TRADE Financial Corporation (NASDAQ:ETFC) was held by Omni Partners, which reported holding $173.9 million worth of stock at the end of September. It was followed by D E Shaw with a $162.7 million position. Other investors bullish on the company included Magnetar Capital, Water Island Capital, and Carlson Capital. In terms of the portfolio weights assigned to each position Omni Partners allocated the biggest weight to E*TRADE Financial Corporation (NASDAQ:ETFC), around 20.54% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, earmarking 11.92 percent of its 13F equity portfolio to ETFC.

Due to the fact that E*TRADE Financial Corporation (NASDAQ:ETFC) has faced falling interest from the aggregate hedge fund industry, logic holds that there was a specific group of funds who were dropping their full holdings last quarter. Interestingly, Carl Tiedemann and Michael Tiedemann’s TIG Advisors dropped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, totaling an estimated $33 million in stock. Ben Levine, Andrew Manuel and Stefan Renold’s fund, LMR Partners, also dumped its stock, about $13.5 million worth. These transactions are important to note, as total hedge fund interest was cut by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as E*TRADE Financial Corporation (NASDAQ:ETFC) but similarly valued. These stocks are Wabtec Corporation (NYSE:WAB), Logitech International SA (NASDAQ:LOGI), Nordson Corporation (NASDAQ:NDSN), DraftKings Inc. (NASDAQ:DKNG), PerkinElmer, Inc. (NYSE:PKI), Cloudflare, Inc. (NYSE:NET), and Horizon Therapeutics Public Limited Company (NASDAQ:HZNP). All of these stocks’ market caps are closest to ETFC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WAB 39 1528246 -2
LOGI 13 277342 -2
NDSN 21 67604 -1
DKNG 53 693614 18
PKI 30 1263237 9
NET 36 456001 12
HZNP 45 2955360 4
Average 33.9 1034486 5.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.9 hedge funds with bullish positions and the average amount invested in these stocks was $1034 million. That figure was $1370 million in ETFC’s case. DraftKings Inc. (NASDAQ:DKNG) is the most popular stock in this table. On the other hand Logitech International SA (NASDAQ:LOGI) is the least popular one with only 13 bullish hedge fund positions. E*TRADE Financial Corporation (NASDAQ:ETFC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ETFC is 52.8. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately ETFC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ETFC were disappointed as the stock returned 9.1% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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