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 (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Encompass Health Corporation (NYSE:EHC)? The smart money sentiment can provide an answer to this question.
Is Encompass Health Corporation (NYSE:EHC) a healthy stock for your portfolio? Money managers are taking a bullish view. The number of long hedge fund positions rose by 4 in recent months. Our calculations also showed that EHC 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). EHC was in 29 hedge funds’ portfolios at the end of December. There were 25 hedge funds in our database with EHC holdings at the end of the previous quarter.
In the financial world there are dozens of indicators stock traders use to value publicly traded companies. A pair of the most underrated indicators are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the top picks of the elite money managers can beat the market by a superb margin (see the details here).
Kris Jenner of Rock Springs Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. With all of this in mind let’s take a look at the recent hedge fund action surrounding Encompass Health Corporation (NYSE:EHC).
How have hedgies been trading Encompass Health Corporation (NYSE:EHC)?
At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the previous quarter. On the other hand, there were a total of 30 hedge funds with a bullish position in EHC 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.
More specifically, Rock Springs Capital Management was the largest shareholder of Encompass Health Corporation (NYSE:EHC), with a stake worth $56.5 million reported as of the end of September. Trailing Rock Springs Capital Management was Millennium Management, which amassed a stake valued at $56 million. Citadel Investment Group, Point72 Asset Management, and Two Sigma Advisors 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 Iron Triangle Partners allocated the biggest weight to Encompass Health Corporation (NYSE:EHC), around 7.28% of its 13F portfolio. Endurant Capital Management is also relatively very bullish on the stock, setting aside 3.56 percent of its 13F equity portfolio to EHC.
As aggregate interest increased, specific money managers were breaking ground themselves. Iron Triangle Partners, managed by Kevin Molloy, assembled the most outsized position in Encompass Health Corporation (NYSE:EHC). Iron Triangle Partners had $27.5 million invested in the company at the end of the quarter. Donald Sussman’s Paloma Partners also made a $4.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Charles Davidson and Joseph Jacobs’s Wexford Capital, David Harding’s Winton Capital Management, and Michael Gelband’s ExodusPoint Capital.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Encompass Health Corporation (NYSE:EHC) but similarly valued. These stocks are Prosperity Bancshares, Inc. (NYSE:PB), Ultrapar Participacoes SA (NYSE:UGP), Planet Fitness Inc (NYSE:PLNT), and Old Republic International Corporation (NYSE:ORI). This group of stocks’ market caps match EHC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PB | 22 | 179901 | 4 |
| UGP | 5 | 70272 | 0 |
| PLNT | 34 | 837711 | -3 |
| ORI | 20 | 344967 | 3 |
| Average | 20.25 | 358213 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $358 million. That figure was $360 million in EHC’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Ultrapar Participacoes SA (NYSE:UGP) is the least popular one with only 5 bullish hedge fund positions. Encompass Health Corporation (NYSE:EHC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. Hedge funds were also right about betting on EHC as the stock returned -16.9% during the first quarter (through March 16th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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.
