Were Hedge Funds Right About Dumping Establishment Labs Holdings Inc. (ESTA)

Before we spend days researching a stock idea we’d like to take a look at how hedge funds and billionaire investors recently traded that stock. S&P 500 Index ETF (SPY) lost 13.5% in the fourth quarter. Seven out of 11 industry groups in the S&P 500 Index were down more than 20% from their 52-week highs at the trough of the stock market crash. The average return of a randomly picked stock in the index was even worse. This means you (or a monkey throwing a dart) have less than an even chance of beating the market by randomly picking a stock. On the other hand, the top 15 most popular S&P 500 stocks among hedge funds not only recouped their Q4 losses but also outperformed the index by more than 3 percentage points. In this article, we will take a look at what hedge funds think about Establishment Labs Holdings Inc. (NASDAQ:ESTA).

Is Establishment Labs Holdings Inc. (NASDAQ:ESTA) going to take off soon? The smart money is in a pessimistic mood. The number of bullish hedge fund bets shrunk by 3 lately. Our calculations also showed that esta isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

Richard Driehaus

We’re going to review the latest hedge fund action surrounding Establishment Labs Holdings Inc. (NASDAQ:ESTA).

Hedge fund activity in Establishment Labs Holdings Inc. (NASDAQ:ESTA)

At Q4’s end, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from the previous quarter. On the other hand, there were a total of 0 hedge funds with a bullish position in ESTA 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.

No of Hedge Funds with ESTA Positions

The largest stake in Establishment Labs Holdings Inc. (NASDAQ:ESTA) was held by Perceptive Advisors, which reported holding $15.9 million worth of stock at the end of December. It was followed by Nantahala Capital Management with a $13.6 million position. Other investors bullish on the company included venBio Select Advisor, Driehaus Capital, and Pura Vida Investments.

Because Establishment Labs Holdings Inc. (NASDAQ:ESTA) has faced a decline in interest from the aggregate hedge fund industry, we can see that there is a sect of money managers that elected to cut their positions entirely heading into Q3. Interestingly, Steve Cohen’s Point72 Asset Management cut the largest investment of the 700 funds watched by Insider Monkey, worth about $1 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund said goodbye to about $1 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Establishment Labs Holdings Inc. (NASDAQ:ESTA) but similarly valued. We will take a look at Tristate Capital Holdings Inc (NASDAQ:TSC), Camden National Corporation (NASDAQ:CAC), Weatherford International plc (NYSE:WFT), and Global Brass and Copper Holdings Inc (NYSE:BRSS). All of these stocks’ market caps match ESTA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TSC 14 58675 -1
CAC 6 50846 0
WFT 22 78735 1
BRSS 15 53276 -2
Average 14.25 60383 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $60 million. That figure was $69 million in ESTA’s case. Weatherford International plc (NYSE:WFT) is the most popular stock in this table. On the other hand Camden National Corporation (NASDAQ:CAC) is the least popular one with only 6 bullish hedge fund positions. Establishment Labs Holdings Inc. (NASDAQ:ESTA) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately ESTA wasn’t nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); ESTA investors were disappointed as the stock returned -15.8% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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