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Were Hedge Funds Right About E*TRADE Financial Corporation (ETFC)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtE*TRADE Financial Corporation (NASDAQ:ETFC) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is E*TRADE Financial Corporation (NASDAQ:ETFC) undervalued? Hedge funds were becoming less hopeful. The number of long hedge fund bets dropped by 11 recently. Our calculations also showed that ETFC 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). ETFC was in 37 hedge funds’ portfolios at the end of March. There were 48 hedge funds in our database with ETFC positions at the end of the previous quarter.

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

At the moment there are a multitude of formulas stock market investors put to use to evaluate their holdings. A pair of the most underrated formulas are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the best picks of the best fund managers can outperform the broader indices by a very impressive amount (see the details here).

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to take a look at the latest hedge fund action regarding E*TRADE Financial Corporation (NASDAQ:ETFC).

How have hedgies been trading E*TRADE Financial Corporation (NASDAQ:ETFC)?

Heading into the second quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ETFC over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is ETFC A Good Stock To Buy?

The largest stake in E*TRADE Financial Corporation (NASDAQ:ETFC) was held by D E Shaw, which reported holding $137 million worth of stock at the end of September. It was followed by Magnetar Capital with a $122.5 million position. Other investors bullish on the company included Omni Partners, Balyasny Asset Management, and Alpine Associates. In terms of the portfolio weights assigned to each position Omni Partners allocated the biggest weight to E*TRADE Financial Corporation (NASDAQ:ETFC), around 8.85% of its 13F portfolio. One Fin Capital Management is also relatively very bullish on the stock, earmarking 5.46 percent of its 13F equity portfolio to ETFC.

Judging by the fact that E*TRADE Financial Corporation (NASDAQ:ETFC) has experienced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of fund managers who sold off their positions entirely last quarter. Interestingly, John Smith Clark’s Southpoint Capital Advisors cut the largest stake of the “upper crust” of funds watched by Insider Monkey, worth about $93 million in stock, and James Parsons’s Junto Capital Management was right behind this move, as the fund sold off about $40.8 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 11 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as E*TRADE Financial Corporation (NASDAQ:ETFC) but similarly valued. These stocks are Dropbox, Inc. (NASDAQ:DBX), CNH Industrial NV (NYSE:CNHI), Carlyle Group LP (NASDAQ:CG), and Zillow Group Inc (NASDAQ:Z). This group of stocks’ market valuations are similar to ETFC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DBX 44 985316 -2
CNHI 17 156917 1
CG 16 232286 3
Z 37 1368913 0
Average 28.5 685858 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $686 million. That figure was $942 million in ETFC’s case. Dropbox, Inc. (NASDAQ:DBX) is the most popular stock in this table. On the other hand Carlyle Group LP (NASDAQ:CG) is the least popular one with only 16 bullish hedge fund positions. E*TRADE Financial Corporation (NASDAQ:ETFC) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on ETFC as the stock returned 45.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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