Was The Smart Money Right About Element Solutions Inc. (ESI)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Element Solutions Inc. (NYSE:ESI).

Is Element Solutions Inc. (NYSE:ESI) an outstanding investment right now? The best stock pickers were getting more bullish. The number of bullish hedge fund positions inched up by 2 recently. Element Solutions Inc. (NYSE:ESI) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 40. Our calculations also showed that ESI 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 35 hedge funds in our database with ESI positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Today there are many signals stock traders put to use to assess stocks. Two of the most under-the-radar signals are hedge fund and insider trading indicators. We have shown that, historically, those who follow the best picks of the elite money managers can outclass the S&P 500 by a solid margin (see the details here).

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. 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. 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 to get excerpts of these letters in your inbox. Now we’re going to review the fresh hedge fund action encompassing Element Solutions Inc. (NYSE:ESI).

What does smart money think about Element Solutions Inc. (NYSE:ESI)?

Heading into the third quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ESI over the last 20 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ESI A Good Stock To Buy?

The largest stake in Element Solutions Inc. (NYSE:ESI) was held by Gates Capital Management, which reported holding $105.8 million worth of stock at the end of June. It was followed by Glenview Capital with a $34.7 million position. Other investors bullish on the company included MIC Capital Partners, Arrowstreet Capital, and Scoggin. In terms of the portfolio weights assigned to each position MIC Capital Partners allocated the biggest weight to Element Solutions Inc. (NYSE:ESI), around 13.94% of its 13F portfolio. Scoggin is also relatively very bullish on the stock, designating 6.7 percent of its 13F equity portfolio to ESI.

As aggregate interest increased, key hedge funds have been driving this bullishness. Albar Capital, managed by Javier Velazquez, created the most outsized position in Element Solutions Inc. (NYSE:ESI). Albar Capital had $11.2 million invested in the company at the end of the quarter. Mark Coe’s Intrinsic Edge Capital also initiated a $8.8 million position during the quarter. The following funds were also among the new ESI investors: Renaissance Technologies, David Harding’s Winton Capital Management, and Benjamin A. Smith’s Laurion Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Element Solutions Inc. (NYSE:ESI) but similarly valued. These stocks are 21Vianet Group Inc (NASDAQ:VNET), Equinox Gold Corp. (NYSE:EQX), Turning Point Therapeutics, Inc. (NASDAQ:TPTX), Amarin Corporation plc (NASDAQ:AMRN), Macquarie Infrastructure Corporation (NYSE:MIC), Itron, Inc. (NASDAQ:ITRI), and AllianceBernstein Holding LP (NYSE:AB). This group of stocks’ market values are closest to ESI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VNET 19 266431 4
EQX 14 122841 7
TPTX 30 524757 11
AMRN 32 477249 -7
MIC 38 564202 8
ITRI 13 300874 -6
AB 7 23909 0
Average 21.9 325752 2.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.9 hedge funds with bullish positions and the average amount invested in these stocks was $326 million. That figure was $412 million in ESI’s case. Macquarie Infrastructure Corporation (NYSE:MIC) is the most popular stock in this table. On the other hand AllianceBernstein Holding LP (NYSE:AB) is the least popular one with only 7 bullish hedge fund positions. Element Solutions Inc. (NYSE:ESI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ESI is 83.1. 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 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on ESI, though not to the same extent, as the stock returned 8% since Q2 (through October 30th) and outperformed the market as well.

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