Hedge Funds Are Cashing Out Of Essent Group Ltd (ESNT)

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Essent Group Ltd (NYSE:ESNT).

Is Essent Group Ltd (NYSE:ESNT) a good investment right now? Investors who are in the know were getting less bullish. The number of long hedge fund positions dropped by 2 in recent months. Essent Group Ltd (NYSE:ESNT) was in 22 hedge funds’ portfolios at the end of June. The all time high for this statistic is 36. Our calculations also showed that ESNT isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 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 79 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.

Donald Sussman of Paloma Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let’s take a look at the fresh hedge fund action surrounding Essent Group Ltd (NYSE:ESNT).

Do Hedge Funds Think ESNT Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ESNT over the last 24 quarters. With the smart money’s capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Rima Senvest Management, managed by Richard Mashaal, holds the number one position in Essent Group Ltd (NYSE:ESNT). Rima Senvest Management has a $125.7 million position in the stock, comprising 3.7% of its 13F portfolio. Sitting at the No. 2 spot is Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, which holds a $108.4 million position; 0.5% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions consist of Greg Poole’s Echo Street Capital Management, Ken Griffin’s Citadel Investment Group and Peter Seuss’s Prana Capital Management. In terms of the portfolio weights assigned to each position Rima Senvest Management allocated the biggest weight to Essent Group Ltd (NYSE:ESNT), around 3.66% of its 13F portfolio. King Street Capital is also relatively very bullish on the stock, earmarking 0.48 percent of its 13F equity portfolio to ESNT.

Because Essent Group Ltd (NYSE:ESNT) has faced falling interest from hedge fund managers, logic holds that there lies a certain “tier” of fund managers that decided to sell off their positions entirely heading into Q3. It’s worth mentioning that Carl Goldsmith and Scott Klein’s Beach Point Capital Management dumped the largest investment of the 750 funds watched by Insider Monkey, comprising an estimated $6.4 million in stock, and Mike Vranos’s Ellington was right behind this move, as the fund cut about $5.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Essent Group Ltd (NYSE:ESNT) but similarly valued. We will take a look at Companhia de Saneamento Basico (NYSE:SBS), SunPower Corporation (NASDAQ:SPWR), RBC Bearings Incorporated (NASDAQ:ROLL), Ortho Clinical Diagnostics Holdings plc (NASDAQ:OCDX), MSC Industrial Direct Co Inc (NYSE:MSM), Valmont Industries, Inc. (NYSE:VMI), and 3D Systems Corporation (NYSE:DDD). This group of stocks’ market valuations are closest to ESNT’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.4 hedge funds with bullish positions and the average amount invested in these stocks was $294 million. That figure was $318 million in ESNT’s case. SunPower Corporation (NASDAQ:SPWR) is the most popular stock in this table. On the other hand RBC Bearings Incorporated (NASDAQ:ROLL) is the least popular one with only 9 bullish hedge fund positions. Essent Group Ltd (NYSE:ESNT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ESNT is 62. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on ESNT as the stock returned 9.5% since the end of Q2 (through 10/22) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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