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

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether E*TRADE Financial Corporation (NASDAQ:ETFC) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Is E*TRADE Financial Corporation (NASDAQ:ETFC) worth your attention right now? The smart money is getting more optimistic. The number of long hedge fund positions advanced by 4 in recent months. Our calculations also showed that ETFC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). ETFC was in 48 hedge funds’ portfolios at the end of December. There were 44 hedge funds in our database with ETFC holdings at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the key hedge fund action encompassing E*TRADE Financial Corporation (NASDAQ:ETFC).

How are hedge funds trading E*TRADE Financial Corporation (NASDAQ:ETFC)?

At Q4’s end, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the third quarter of 2019. On the other hand, there were a total of 41 hedge funds with a bullish position in ETFC a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D E Shaw held the most valuable stake in E*TRADE Financial Corporation (NASDAQ:ETFC), which was worth $167.5 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $127.6 million worth of shares. Millennium Management, Southpoint Capital Advisors, and Balyasny Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Azora Capital allocated the biggest weight to E*TRADE Financial Corporation (NASDAQ:ETFC), around 4.62% of its 13F portfolio. Southpoint Capital Advisors is also relatively very bullish on the stock, earmarking 3.35 percent of its 13F equity portfolio to ETFC.

Consequently, some big names were leading the bulls’ herd. Junto Capital Management, managed by James Parsons, assembled the biggest position in E*TRADE Financial Corporation (NASDAQ:ETFC). Junto Capital Management had $40.8 million invested in the company at the end of the quarter. Ravi Chopra’s Azora Capital also initiated a $32.6 million position during the quarter. The following funds were also among the new ETFC investors: Emanuel J. Friedman’s EJF Capital, John Overdeck and David Siegel’s Two Sigma Advisors, and Eli Cohen’s Crescent Park Management.

Let’s now review hedge fund activity in other stocks similar to E*TRADE Financial Corporation (NASDAQ:ETFC). We will take a look at Reinsurance Group of America Inc (NYSE:RGA), Textron Inc. (NYSE:TXT), FactSet Research Systems Inc. (NYSE:FDS), and Essential Utilities, Inc. (NYSE:WTR). This group of stocks’ market values resemble ETFC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RGA 27 412374 1
TXT 30 859950 5
FDS 24 225368 3
WTR 21 704399 -14
Average 25.5 550523 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $551 million. That figure was $947 million in ETFC’s case. Textron Inc. (NYSE:TXT) is the most popular stock in this table. On the other hand Essential Utilities, Inc. (NYSE:WTR) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks E*TRADE Financial Corporation (NASDAQ:ETFC) is more popular among hedge funds. 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 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately ETFC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ETFC were disappointed as the stock returned -12.8% during the four months of 2020 (through May 1st) 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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