Ellington Financial LLC (NYSE:EFC) announced yesterday in a press release that its estimated book value per common share is $23.04, or on a diluted basis, $22.75, as of June 30, 2015. However, Ellington Financial LLC (NYSE:EFC)’s stock closed at just $18.88 on Wednesday. This puts the stock at about a 17% discount to book value, which is indeed a big discount. Nonetheless, analysts at Zacks downgraded the specialty finance company to a ‘Strong Sell’ from a ‘Hold’ rating on July 7, which perhaps prompted the press release a day later, and investors have reacted with seeming apathy to Ellington’s assertions of its own value, with the stock trading only marginally up in afternoon trading today, by less than half a percentage point. Does the smart money see this untapped potential in the specialty financial company, which primarily manages mortgage-related assets? According to the data, not particularly.
Looking at the hedge funds tracked by Insider Monkey, there was no change in the number of hedge funds with positions in the stock at the end of the first quarter, when compared to the prior quarter, as eight funds maintained positions in the stock. The aggregate capital invested by these hedge funds fell by around 3% meanwhile, to $75.08 million. Considering the fact that Ellington Financial LLC (NYSE:EFC)’s stock dropped by a minuscule 0.8% in the first three months of the year, we can say that hedge funds pulled a small amount of capital out of the stock during that time. Nor were they wrong to do so, as shares fell by 7% during the second quarter. Considering the fact that Ellington Financial happens to be an affiliate of Mike Vranos‘ Ellington Management Group, which holds over half of the shares collectively owned by hedge funds we track, we can say that the unaffiliated ownership is even far less than it appears at first glance.
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Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012 when this system went live, returning a cumulative 135% vs. less than 55% for the S&P 500 Index (read the details).
Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. That said, there was no insider activity on the stock during the first half of this year.
With all of this in mind, let’s take a look at the recent hedge fund activity surrounding Ellington Financial LLC (NYSE:EFC).