Did Hedge Funds Make The Right Call On e.l.f. Beauty, Inc. (ELF) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards e.l.f. Beauty, Inc. (NYSE:ELF) at the end of the first quarter and determine whether the smart money was really smart about this stock.

e.l.f. Beauty, Inc. (NYSE:ELF) was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. ELF shareholders have witnessed a decrease in support from the world’s most elite money managers recently. There were 24 hedge funds in our database with ELF positions at the end of the previous quarter. Our calculations also showed that ELF 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).

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

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Tudor Jones of Tudor Investment Corp

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a peek at the recent hedge fund action surrounding e.l.f. Beauty, Inc. (NYSE:ELF).

How are hedge funds trading e.l.f. Beauty, Inc. (NYSE:ELF)?

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ELF over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in e.l.f. Beauty, Inc. (NYSE:ELF) was held by Lomas Capital Management, which reported holding $33.6 million worth of stock at the end of September. It was followed by Bayberry Capital Partners with a $20.2 million position. Other investors bullish on the company included Marathon Partners, Renaissance Technologies, and Driehaus Capital. In terms of the portfolio weights assigned to each position Marathon Partners allocated the biggest weight to e.l.f. Beauty, Inc. (NYSE:ELF), around 12.26% of its 13F portfolio. Bayberry Capital Partners is also relatively very bullish on the stock, setting aside 8.24 percent of its 13F equity portfolio to ELF.

Due to the fact that e.l.f. Beauty, Inc. (NYSE:ELF) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there was a specific group of money managers who sold off their full holdings last quarter. At the top of the heap, Steve Cohen’s Point72 Asset Management cut the largest investment of all the hedgies watched by Insider Monkey, comprising an estimated $13.7 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund sold off about $7.8 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to e.l.f. Beauty, Inc. (NYSE:ELF). We will take a look at PGT Innovations Inc. (NASDAQ:PGTI), Globalstar, Inc. (PINK:GSAT), Criteo SA (NASDAQ:CRTO), and Allegiance Bancshares, Inc. (NASDAQ:ABTX). This group of stocks’ market values resemble ELF’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $135 million in ELF’s case. PGT Innovations Inc. (NASDAQ:PGTI) is the most popular stock in this table. On the other hand Allegiance Bancshares, Inc. (NASDAQ:ABTX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks e.l.f. Beauty, Inc. (NYSE:ELF) 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on ELF as the stock returned 78.7% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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