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 (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Elbit Systems Ltd. (NASDAQ:ESLT), so let’s take a closer look at the sentiment that surrounds it in the current quarter.
Elbit Systems Ltd. (NASDAQ:ESLT) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 3 hedge funds’ portfolios at the end of the fourth quarter of 2019. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Encompass Health Corporation (NYSE:EHC), Prosperity Bancshares, Inc. (NYSE:PB), and Ultrapar Participacoes SA (NYSE:UGP) to gather more data points. Our calculations also showed that ESLT 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).
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.
Jim Simons of Renaissance Technologies
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 check out the recent hedge fund action regarding Elbit Systems Ltd. (NASDAQ:ESLT).
How have hedgies been trading Elbit Systems Ltd. (NASDAQ:ESLT)?
Heading into the first quarter of 2020, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 3 hedge funds held shares or bullish call options in ESLT a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Elbit Systems Ltd. (NASDAQ:ESLT), with a stake worth $7.8 million reported as of the end of September. Trailing Renaissance Technologies was Fisher Asset Management, which amassed a stake valued at $3.7 million. D E Shaw was 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 Renaissance Technologies allocated the biggest weight to Elbit Systems Ltd. (NASDAQ:ESLT), around 0.01% of its 13F portfolio. Fisher Asset Management is also relatively very bullish on the stock, setting aside 0.0038 percent of its 13F equity portfolio to ESLT.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Elbit Systems Ltd. (NASDAQ:ESLT) but similarly valued. These stocks are Encompass Health Corporation (NYSE:EHC), Prosperity Bancshares, Inc. (NYSE:PB), Ultrapar Participacoes SA (NYSE:UGP), and Planet Fitness Inc (NYSE:PLNT). This group of stocks’ market values match ESLT’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EHC | 29 | 360336 | 4 |
| PB | 22 | 179901 | 4 |
| UGP | 5 | 70272 | 0 |
| PLNT | 34 | 837711 | -3 |
| Average | 22.5 | 362055 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $362 million. That figure was $12 million in ESLT’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand Ultrapar Participacoes SA (NYSE:UGP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Elbit Systems Ltd. (NASDAQ:ESLT) is even less popular than UGP. 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 22.3% in 2020 through March 16th but managed to beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on ESLT, though not to the same extent, as the stock returned -25.5% during the same time period and outperformed the market as well.
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.
