Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. With this in mind let’s see whether Eldorado Resorts Inc (NASDAQ:ERI) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Eldorado Resorts Inc (NASDAQ:ERI) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 49 hedge funds’ portfolios at the end of December. At the end of this article we will also compare ERI to other stocks including Companhia Paranaense de Energia (NYSE:ELP), Valley National Bancorp (NYSE:VLY), and Ardagh Group S.A. (NYSE:ARD) to get a better sense of its popularity.
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 S&P 500 ETFs by more than 41 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. 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.
Seth Klarman of Baupost Group
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. Now we’re going to take a gander at the recent hedge fund action surrounding Eldorado Resorts Inc (NASDAQ:ERI).
How have hedgies been trading Eldorado Resorts Inc (NASDAQ:ERI)?
Heading into the first quarter of 2020, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the third quarter of 2019. On the other hand, there were a total of 29 hedge funds with a bullish position in ERI a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Canyon Capital Advisors held the most valuable stake in Eldorado Resorts Inc (NASDAQ:ERI), which was worth $313.1 million at the end of the third quarter. On the second spot was HG Vora Capital Management which amassed $149.1 million worth of shares. Park West Asset Management, Silver Point Capital, and Lafitte 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 Lafitte Capital Management allocated the biggest weight to Eldorado Resorts Inc (NASDAQ:ERI), around 52.62% of its 13F portfolio. 1060 Capital Management is also relatively very bullish on the stock, earmarking 24 percent of its 13F equity portfolio to ERI.
Due to the fact that Eldorado Resorts Inc (NASDAQ:ERI) has witnessed a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of funds that elected to cut their full holdings by the end of the third quarter. It’s worth mentioning that Mark Coe’s Intrinsic Edge Capital dropped the largest stake of all the hedgies watched by Insider Monkey, comprising close to $15.9 million in stock. Daniel Lascano’s fund, Lomas Capital Management, also said goodbye to its stock, about $8.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks similar to Eldorado Resorts Inc (NASDAQ:ERI). These stocks are Companhia Paranaense de Energia (NYSE:ELP), Valley National Bancorp (NASDAQ:VLY), Ardagh Group S.A. (NYSE:ARD), and Grand Canyon Education Inc (NASDAQ:LOPE). This group of stocks’ market values match ERI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ELP | 7 | 77363 | -1 |
| VLY | 24 | 61415 | 8 |
| ARD | 9 | 81330 | -3 |
| LOPE | 20 | 115370 | -7 |
| Average | 15 | 83870 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $1338 million in ERI’s case. Valley National Bancorp (NASDAQ:VLY) is the most popular stock in this table. On the other hand Companhia Paranaense de Energia (NYSE:ELP) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Eldorado Resorts Inc (NASDAQ:ERI) is more popular among hedge funds. 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 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately ERI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ERI were disappointed as the stock returned -72% during the first two and a half months of 2020 (through March 25th) 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 most of these stocks already outperformed the market in Q1.
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.
