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Should You Avoid Elanco Animal Health Incorporated (ELAN)?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Elanco Animal Health Incorporated (NYSE:ELAN).

Elanco Animal Health Incorporated (NYSE:ELAN) investors should be aware of a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that ELAN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the fresh hedge fund action regarding Elanco Animal Health Incorporated (NYSE:ELAN).

What does smart money think about Elanco Animal Health Incorporated (NYSE:ELAN)?

At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ELAN over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ELAN Positions

Among these funds, Sirios Capital Management held the most valuable stake in Elanco Animal Health Incorporated (NYSE:ELAN), which was worth $93.3 million at the end of the third quarter. On the second spot was Laurion Capital Management which amassed $61.6 million worth of shares. D E Shaw, Crescent Park Management, and Citadel Investment Group 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 Sirios Capital Management allocated the biggest weight to Elanco Animal Health Incorporated (NYSE:ELAN), around 6.15% of its portfolio. Crescent Park Management is also relatively very bullish on the stock, setting aside 4.92 percent of its 13F equity portfolio to ELAN.

Due to the fact that Elanco Animal Health Incorporated (NYSE:ELAN) has witnessed bearish sentiment from the smart money, logic holds that there were a few fund managers who sold off their positions entirely by the end of the third quarter. It’s worth mentioning that Arthur B Cohen and Joseph Healey’s Healthcor Management dropped the biggest stake of the 750 funds watched by Insider Monkey, comprising an estimated $97.3 million in stock, and Philip Hilal’s Clearfield Capital was right behind this move, as the fund dropped about $27.9 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 3 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Elanco Animal Health Incorporated (NYSE:ELAN) but similarly valued. We will take a look at Bio-Rad Laboratories, Inc. (NYSE:BIO), Marathon Oil Corporation (NYSE:MRO), Comerica Incorporated (NYSE:CMA), and Teradyne, Inc. (NASDAQ:TER). This group of stocks’ market valuations resemble ELAN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BIO 39 1091143 3
MRO 35 394969 3
CMA 28 468164 -4
TER 31 1128584 4
Average 33.25 770715 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $771 million. That figure was $359 million in ELAN’s case. Bio-Rad Laboratories, Inc. (NYSE:BIO) is the most popular stock in this table. On the other hand Comerica Incorporated (NYSE:CMA) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Elanco Animal Health Incorporated (NYSE:ELAN) is even less popular than CMA. Hedge funds dodged a bullet by taking a bearish stance towards ELAN. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ELAN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ELAN investors were disappointed as the stock returned 4.2% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.

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

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