“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Eros International plc (NYSE:EROS) in order to identify whether reputable and successful top money managers continue to believe in its potential.
Eros International plc (NYSE:EROS) was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. EROS shareholders have witnessed a decrease in support from the world’s most elite money managers in recent months. There were 8 hedge funds in our database with EROS holdings at the end of the previous quarter. Our calculations also showed that EROS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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.
David E. Shaw of D.E. Shaw
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to check out the latest hedge fund action encompassing Eros International plc (NYSE:EROS).
What have hedge funds been doing with Eros International plc (NYSE:EROS)?
At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards EROS over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, Shah Capital Management was the largest shareholder of Eros International plc (NYSE:EROS), with a stake worth $7.1 million reported as of the end of September. Trailing Shah Capital Management was D E Shaw, which amassed a stake valued at $2.2 million. Renaissance Technologies, Two Sigma Advisors, 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 Shah Capital Management allocated the biggest weight to Eros International plc (NYSE:EROS), around 3.85% of its 13F portfolio. D E Shaw is also relatively very bullish on the stock, dishing out 0.0027 percent of its 13F equity portfolio to EROS.
Since Eros International plc (NYSE:EROS) has faced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of money managers who sold off their full holdings by the end of the third quarter. At the top of the heap, Israel Englander’s Millennium Management dropped the biggest position of the “upper crust” of funds followed by Insider Monkey, worth close to $3.3 million in stock, and Nathaniel August’s Mangrove Partners was right behind this move, as the fund cut about $0.2 million worth. These moves are important to note, as total hedge fund interest was cut by 2 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Eros International plc (NYSE:EROS) but similarly valued. We will take a look at Atento SA (NYSE:ATTO), Fluent, Inc. (NASDAQ:FLNT), SeaDrill Limited (NYSE:SDRL), and Earthstone Energy, Inc. (NYSE:ESTE). This group of stocks’ market valuations are similar to EROS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ATTO | 7 | 1952 | -2 |
| FLNT | 8 | 5064 | -1 |
| SDRL | 17 | 53253 | -1 |
| ESTE | 8 | 856 | 1 |
| Average | 10 | 15281 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $13 million in EROS’s case. SeaDrill Limited (NYSE:SDRL) is the most popular stock in this table. On the other hand Atento SA (NYSE:ATTO) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Eros International plc (NYSE:EROS) is even less popular than ATTO. Hedge funds clearly dropped the ball on EROS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on EROS as the stock returned 39.8% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
