How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Ethan Allen Interiors Inc. (NYSE:ETH) and determine whether hedge funds had an edge regarding this stock.
Ethan Allen Interiors Inc. (NYSE:ETH) was in 12 hedge funds’ portfolios at the end of the first quarter of 2020. ETH shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. There were 14 hedge funds in our database with ETH holdings at the end of the previous quarter. Our calculations also showed that ETH 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.
To most stock holders, hedge funds are seen as slow, old investment tools of years past. While there are more than 8000 funds trading at the moment, Our researchers hone in on the bigwigs of this group, approximately 850 funds. These hedge fund managers orchestrate the majority of the smart money’s total capital, and by tailing their inimitable picks, Insider Monkey has figured out numerous investment strategies that have historically surpassed the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
Philippe Laffont of Coatue Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s analyze the latest hedge fund action regarding Ethan Allen Interiors Inc. (NYSE:ETH).
What have hedge funds been doing with Ethan Allen Interiors Inc. (NYSE:ETH)?
At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the fourth quarter of 2019. On the other hand, there were a total of 17 hedge funds with a bullish position in ETH a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the largest position in Ethan Allen Interiors Inc. (NYSE:ETH). Royce & Associates has a $5.9 million position in the stock, comprising 0.1% of its 13F portfolio. On Royce & Associates’s heels is Renaissance Technologies, which holds a $5.5 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money that are bullish include Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Israel Englander’s Millennium Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Ethan Allen Interiors Inc. (NYSE:ETH), around 0.08% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to ETH.
Because Ethan Allen Interiors Inc. (NYSE:ETH) has experienced declining sentiment from the smart money, it’s safe to say that there exists a select few hedge funds who were dropping their full holdings by the end of the first quarter. At the top of the heap, Noam Gottesman’s GLG Partners dumped the largest stake of the 750 funds monitored by Insider Monkey, comprising close to $1.4 million in stock, and Hoon Kim’s Quantinno Capital was right behind this move, as the fund dumped about $0.6 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds by the end of the first quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Ethan Allen Interiors Inc. (NYSE:ETH) but similarly valued. We will take a look at BJ’s Restaurants, Inc. (NASDAQ:BJRI), McEwen Mining Inc (NYSE:MUX), Sterling Construction Company, Inc. (NASDAQ:STRL), and Mersana Therapeutics, Inc. (NASDAQ:MRSN). All of these stocks’ market caps match ETH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BJRI | 13 | 14101 | -3 |
| MUX | 8 | 4470 | -4 |
| STRL | 14 | 34308 | -1 |
| MRSN | 17 | 82654 | 2 |
| Average | 13 | 33883 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $34 million. That figure was $20 million in ETH’s case. Mersana Therapeutics, Inc. (NASDAQ:MRSN) is the most popular stock in this table. On the other hand McEwen Mining Inc (NYSE:MUX) is the least popular one with only 8 bullish hedge fund positions. Ethan Allen Interiors Inc. (NYSE:ETH) 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 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 gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately ETH wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ETH investors were disappointed as the stock returned 18.4% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
