Were Hedge Funds Right About The Estee Lauder Companies Inc (EL)?

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. Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the fourth quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4 years and analyze what the smart money thinks of The Estee Lauder Companies Inc (NYSE:EL) based on that data.

Is The Estee Lauder Companies Inc (NYSE:EL) going to take off soon? Prominent investors are becoming hopeful. The number of bullish hedge fund positions advanced by 2 recently. Our calculations also showed that EL 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). EL was in 50 hedge funds’ portfolios at the end of December. There were 48 hedge funds in our database with EL holdings at the end of the previous quarter.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Driehaus of Driehaus Capital

Now let’s review the key hedge fund action encompassing The Estee Lauder Companies Inc (NYSE:EL).

How have hedgies been trading The Estee Lauder Companies Inc (NYSE:EL)?

At the end of the fourth quarter, a total of 50 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in EL over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Cliff Asness’s AQR Capital Management has the largest position in The Estee Lauder Companies Inc (NYSE:EL), worth close to $388.9 million, accounting for 0.4% of its total 13F portfolio. The second largest stake is held by Renaissance Technologies, holding a $313.5 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism encompass Nicolai Tangen’s Ako Capital, Gabriel Plotkin’s Melvin Capital Management and Steve Cohen’s Point72 Asset Management. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to The Estee Lauder Companies Inc (NYSE:EL), around 4.64% of its 13F portfolio. Ako Capital is also relatively very bullish on the stock, designating 4.17 percent of its 13F equity portfolio to EL.

As aggregate interest increased, some big names have jumped into The Estee Lauder Companies Inc (NYSE:EL) headfirst. Ako Capital, managed by Nicolai Tangen, created the most valuable position in The Estee Lauder Companies Inc (NYSE:EL). Ako Capital had $194 million invested in the company at the end of the quarter. Rajiv Jain’s GQG Partners also initiated a $101.5 million position during the quarter. The other funds with brand new EL positions are Richard Driehaus’s Driehaus Capital, Alexander Mitchell’s Scopus Asset Management, and Steven Boyd’s Armistice Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Estee Lauder Companies Inc (NYSE:EL) but similarly valued. We will take a look at Automatic Data Processing, Inc. (NASDAQ:ADP), Becton, Dickinson and Company (NYSE:BDX), The TJX Companies, Inc. (NYSE:TJX), and Ambev SA (NYSE:ABEV). This group of stocks’ market valuations are similar to EL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ADP 51 2821795 -5
BDX 50 1447307 -1
TJX 57 2182820 4
ABEV 14 548416 -5
Average 43 1750085 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 43 hedge funds with bullish positions and the average amount invested in these stocks was $1750 million. That figure was $1697 million in EL’s case. The TJX Companies, Inc. (NYSE:TJX) is the most popular stock in this table. On the other hand Ambev SA (NYSE:ABEV) is the least popular one with only 14 bullish hedge fund positions. The Estee Lauder Companies Inc (NYSE:EL) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately EL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EL were disappointed as the stock returned -16.2% during the same time period 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 many of these stocks already outperformed the market so far this year.
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.