Was The Smart Money Right About Piling Into Elanco Animal Health (ELAN)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Elanco Animal Health Incorporated (NYSE:ELAN)? The smart money sentiment can provide an answer to this question.

Elanco Animal Health Incorporated (NYSE:ELAN) was in 43 hedge funds’ portfolios at the end of December. The all time high for this statistic was previously 36. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. ELAN has experienced an increase in support from the world’s most elite money managers of late. There were 21 hedge funds in our database with ELAN positions at the end of the third quarter. Our calculations also showed that ELAN isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.

Scott Ferguson Sachem Head Capital

Scott Ferguson of Sachem Head Capital

At Insider Monkey we leave no stone unturned when looking for 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 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we’re going to check out the latest hedge fund action encompassing Elanco Animal Health Incorporated (NYSE:ELAN).

Do Hedge Funds Think ELAN Is A Good Stock To Buy Now?

At fourth quarter’s end, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 105% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in ELAN a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Elanco Animal Health Incorporated (NYSE:ELAN) was held by Sachem Head Capital, which reported holding $853.7 million worth of stock at the end of December. It was followed by Citadel Investment Group with a $80.6 million position. Other investors bullish on the company included Senator Investment Group, Segantii Capital, and Soros Fund Management. In terms of the portfolio weights assigned to each position Sachem Head Capital allocated the biggest weight to Elanco Animal Health Incorporated (NYSE:ELAN), around 29.79% of its 13F portfolio. One Fin Capital Management is also relatively very bullish on the stock, designating 7.97 percent of its 13F equity portfolio to ELAN.

As aggregate interest increased, key hedge funds were breaking ground themselves. Soros Fund Management, managed by George Soros, created the largest position in Elanco Animal Health Incorporated (NYSE:ELAN). Soros Fund Management had $46 million invested in the company at the end of the quarter. Frank Fu’s CaaS Capital also initiated a $42.6 million position during the quarter. The other funds with brand new ELAN positions are Dmitry Balyasny’s Balyasny Asset Management, Brandon Haley’s Holocene Advisors, and Steve Cohen’s Point72 Asset Management.

Let’s go over hedge fund activity in other stocks similar to Elanco Animal Health Incorporated (NYSE:ELAN). These stocks are Teledyne Technologies Incorporated (NYSE:TDY), J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), CureVac N.V. (NASDAQ:CVAC), Masco Corporation (NYSE:MAS), Gartner Inc (NYSE:IT), Generac Holdings Inc. (NYSE:GNRC), and Markel Corporation (NYSE:MKL). This group of stocks’ market values are closest to ELAN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TDY 28 372237 -3
JBHT 26 330836 -12
CVAC 9 23140 0
MAS 40 712440 -6
IT 37 1939657 -1
GNRC 32 559613 -11
MKL 36 941576 2
Average 29.7 697071 -4.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.7 hedge funds with bullish positions and the average amount invested in these stocks was $697 million. That figure was $1493 million in ELAN’s case. Masco Corporation (NYSE:MAS) is the most popular stock in this table. On the other hand CureVac N.V. (NASDAQ:CVAC) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Elanco Animal Health Incorporated (NYSE:ELAN) is more popular among hedge funds. Our overall hedge fund sentiment score for ELAN is 90. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. Unfortunately ELAN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ELAN were disappointed as the stock returned 3.4% since the end of the fourth quarter (through 4/30) 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 most of these stocks already outperformed the market since 2019.

Follow Elanco Animal Health Inc (NYSE:ELAN)

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