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Were Hedge Funds Right About Dumping Employers Holdings, Inc. (EIG)?

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 Employers Holdings, Inc. (NYSE:EIG) and determine whether hedge funds had an edge regarding this stock.

Employers Holdings, Inc. (NYSE:EIG) investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. EIG was in 10 hedge funds’ portfolios at the end of the first quarter of 2020. There were 15 hedge funds in our database with EIG positions at the end of the previous quarter. Our calculations also showed that EIG isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the latest hedge fund action surrounding Employers Holdings, Inc. (NYSE:EIG).

What have hedge funds been doing with Employers Holdings, Inc. (NYSE:EIG)?

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in EIG over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Renaissance Technologies has the biggest position in Employers Holdings, Inc. (NYSE:EIG), worth close to $22.1 million, accounting for less than 0.1%% of its total 13F portfolio. The second largest stake is held by AQR Capital Management, managed by Cliff Asness, which holds a $13.1 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions contain Noam Gottesman’s GLG Partners, John Overdeck and David Siegel’s Two Sigma Advisors and David Harding’s Winton Capital Management. In terms of the portfolio weights assigned to each position Winton Capital Management allocated the biggest weight to Employers Holdings, Inc. (NYSE:EIG), around 0.07% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to EIG.

Because Employers Holdings, Inc. (NYSE:EIG) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there was a specific group of money managers who sold off their full holdings heading into Q4. It’s worth mentioning that John D. Gillespie’s Prospector Partners said goodbye to the largest position of the “upper crust” of funds watched by Insider Monkey, totaling close to $4.6 million in stock. Ron Bobman’s fund, Capital Returns Management, also sold off its stock, about $2.4 million worth. These moves are important to note, as total hedge fund interest fell by 5 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Employers Holdings, Inc. (NYSE:EIG). We will take a look at WSFS Financial Corporation (NASDAQ:WSFS), OSI Systems, Inc. (NASDAQ:OSIS), Park National Corporation (NYSE:PRK), and Rambus Inc. (NASDAQ:RMBS). This group of stocks’ market valuations resemble EIG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WSFS 12 99147 -4
OSIS 15 12739 -5
PRK 6 8226 -4
RMBS 13 143097 -6
Average 11.5 65802 -4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $66 million. That figure was $52 million in EIG’s case. OSI Systems, Inc. (NASDAQ:OSIS) is the most popular stock in this table. On the other hand Park National Corporation (NYSE:PRK) is the least popular one with only 6 bullish hedge fund positions. Employers Holdings, Inc. (NYSE:EIG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately EIG wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); EIG investors were disappointed as the stock returned -24.9% during the second quarter 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 in 2020.

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