We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Essex Property Trust Inc (NYSE:ESS) an attractive stock to buy now? Prominent investors are taking a pessimistic view. The number of long hedge fund bets were trimmed by 1 in recent months. Our calculations also showed that ESS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ESS was in 18 hedge funds’ portfolios at the end of September. There were 19 hedge funds in our database with ESS positions at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Dmitry Balyasny of Balyasny Asset Management
We leave no stone unturned when looking for the next great investment idea. For example, Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a peek at the latest hedge fund action regarding Essex Property Trust Inc (NYSE:ESS).
How are hedge funds trading Essex Property Trust Inc (NYSE:ESS)?
At Q3’s end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2019. On the other hand, there were a total of 16 hedge funds with a bullish position in ESS a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exist a few noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Essex Property Trust Inc (NYSE:ESS), which was worth $299.8 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $25.9 million worth of shares. Waterfront Capital Partners, Millennium Management, and AQR Capital Management 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, Waterfront Capital Partners allocated the biggest weight to Essex Property Trust Inc (NYSE:ESS), around 3.25% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, dishing out 0.25 percent of its 13F equity portfolio to ESS.
Since Essex Property Trust Inc (NYSE:ESS) has faced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedgies that slashed their entire stakes last quarter. It’s worth mentioning that Jeffrey Furber’s AEW Capital Management dropped the biggest investment of the 750 funds monitored by Insider Monkey, valued at an estimated $137.1 million in stock, and Greg Poole’s Echo Street Capital Management was right behind this move, as the fund dumped about $15.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 1 fund last quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Essex Property Trust Inc (NYSE:ESS) but similarly valued. These stocks are TELUS Corporation (NYSE:TU), M&T Bank Corporation (NYSE:MTB), Smith & Nephew plc (NYSE:SNN), and Pioneer Natural Resources Company (NYSE:PXD). All of these stocks’ market caps match ESS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TU | 17 | 301500 | 4 |
| MTB | 29 | 1247730 | -2 |
| SNN | 6 | 297897 | -8 |
| PXD | 47 | 1014267 | -1 |
| Average | 24.75 | 715349 | -1.75 |
View the table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $715 million. That figure was $400 million in ESS’s case. Pioneer Natural Resources Company (NYSE:PXD) is the most popular stock in this table. On the other hand, Smith & Nephew plc (NYSE:SNN) is the least popular one with only 6 bullish hedge fund positions. Essex Property Trust Inc (NYSE:ESS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately, ESS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ESS investors were disappointed as the stock returned -4.4% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large-cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
