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The Eastern Company (EML): Hedge Fund Sentiment Unchanged

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like The Eastern Company (NASDAQ:EML).

The Eastern Company (NASDAQ:EML) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. 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 PC Tel Inc (NASDAQ:PCTI), Fulcrum Therapeutics, Inc. (NASDAQ:FULC), and Kura Sushi USA, Inc. (NASDAQ:KRUS) to gather more data points. 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 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.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

James Mitarotonda Barington Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s go over the recent hedge fund action regarding The Eastern Company (NASDAQ:EML).

What does smart money think about The Eastern Company (NASDAQ:EML)?

Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. On the other hand, there were a total of 7 hedge funds with a bullish position in EML a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Is EML A Good Stock To Buy?

More specifically, Barington Capital Group was the largest shareholder of The Eastern Company (NASDAQ:EML), with a stake worth $14.3 million reported as of the end of September. Trailing Barington Capital Group was GAMCO Investors, which amassed a stake valued at $14 million. Minerva Advisors, Renaissance Technologies, and Ancora Advisors 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 Barington Capital Group allocated the biggest weight to The Eastern Company (NASDAQ:EML), around 17.54% of its 13F portfolio. Minerva Advisors is also relatively very bullish on the stock, setting aside 4.87 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 go over hedge fund activity in other stocks – not necessarily in the same industry as The Eastern Company (NASDAQ:EML) but similarly valued. We will take a look at PC Tel Inc (NASDAQ:PCTI), Fulcrum Therapeutics, Inc. (NASDAQ:FULC), Kura Sushi USA, Inc. (NASDAQ:KRUS), and China Online Education Group (NYSE:COE). All of these stocks’ market caps resemble EML’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PCTI 14 30470 7
FULC 7 16168 7
KRUS 4 14698 4
COE 4 5109 0
Average 7.25 16611 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.25 hedge funds with bullish positions and the average amount invested in these stocks was $17 million. That figure was $44 million in EML’s case. PC Tel Inc (NASDAQ:PCTI) is the most popular stock in this table. On the other hand Kura Sushi USA, Inc. (NASDAQ:KRUS) is the least popular one with only 4 bullish hedge fund positions. The Eastern Company (NASDAQ:EML) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on EML as the stock returned 11.2% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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