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 (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. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article, we look at what those funds think of Element Solutions Inc (NYSE:ESI) based on that data.
Is Element Solutions Inc (NYSE:ESI) undervalued? Investors who are in the know are becoming more confident. The number of bullish hedge fund bets rose by 9 in recent months. Our calculations also showed that ESI 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).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Paul Singer of Elliott 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. Keeping this in mind let’s take a look at the recent hedge fund action regarding Element Solutions Inc (NYSE:ESI).
How have hedgies been trading Element Solutions Inc (NYSE:ESI)?
At Q4’s end, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 32% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in ESI a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Among these funds, Bares Capital Management held the most valuable stake in Element Solutions Inc (NYSE:ESI), which was worth $129.5 million at the end of the third quarter. On the second spot was Elliott Management which amassed $127.8 million worth of shares. Gates Capital Management, Glenview Capital, and MIC Capital Partners 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 MIC Capital Partners allocated the biggest weight to Element Solutions Inc (NYSE:ESI), around 15.06% of its 13F portfolio. Scoggin is also relatively very bullish on the stock, dishing out 11.82 percent of its 13F equity portfolio to ESI.
As one would reasonably expect, some big names were breaking ground themselves. MIC Capital Partners, managed by Mubadala Investment, created the most valuable position in Element Solutions Inc (NYSE:ESI). MIC Capital Partners had $44 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $16.1 million investment in the stock during the quarter. The following funds were also among the new ESI investors: Javier Velazquez’s Albar Capital, D. E. Shaw’s D E Shaw, and Cliff Asness’s AQR Capital Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Element Solutions Inc (NYSE:ESI) but similarly valued. We will take a look at Columbia Banking System Inc (NASDAQ:COLB), South State Corporation (NASDAQ:SSB), Universal Forest Products, Inc. (NASDAQ:UFPI), and NovaGold Resources Inc. (NYSE:NG). This group of stocks’ market caps are closest to ESI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| COLB | 10 | 108526 | 1 |
| SSB | 15 | 63154 | -3 |
| UFPI | 27 | 102127 | 5 |
| NG | 16 | 352933 | 0 |
| Average | 17 | 156685 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $157 million. That figure was $736 million in ESI’s case. Universal Forest Products, Inc. (NASDAQ:UFPI) is the most popular stock in this table. On the other hand Columbia Banking System Inc (NASDAQ:COLB) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Element Solutions Inc (NYSE:ESI) 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 ESI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ESI were disappointed as the stock returned -32.9% 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.
