Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like ESCO Technologies Inc. (NYSE:ESE).
Is ESCO Technologies Inc. (NYSE:ESE) a bargain? Hedge funds are betting on the stock. The number of bullish hedge fund positions improved by 4 recently. Our calculations also showed that ESE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ESE was in 8 hedge funds’ portfolios at the end of September. There were 4 hedge funds in our database with ESE holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Steven Cohen of Point72 Asset Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the key hedge fund action surrounding ESCO Technologies Inc. (NYSE:ESE).
Hedge fund activity in ESCO Technologies Inc. (NYSE:ESE)
Heading into the fourth quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 100% from the previous quarter. On the other hand, there were a total of 6 hedge funds with a bullish position in ESE a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in ESCO Technologies Inc. (NYSE:ESE), which was worth $0.7 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $0.7 million worth of shares. Holocene Advisors, Millennium Management, and Balyasny Asset 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 Holocene Advisors allocated the biggest weight to ESCO Technologies Inc. (NYSE:ESE), around 0.01% of its 13F portfolio. Balyasny Asset Management is also relatively very bullish on the stock, dishing out 0.002 percent of its 13F equity portfolio to ESE.
Consequently, some big names have been driving this bullishness. Renaissance Technologies, created the most valuable position in ESCO Technologies Inc. (NYSE:ESE). Renaissance Technologies had $0.7 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $0.5 million investment in the stock during the quarter. The following funds were also among the new ESE investors: Dmitry Balyasny’s Balyasny Asset Management, Paul Marshall and Ian Wace’s Marshall Wace, and Steve Cohen’s Point72 Asset Management.
Let’s now review hedge fund activity in other stocks similar to ESCO Technologies Inc. (NYSE:ESE). We will take a look at Ladder Capital Corp (NYSE:LADR), Core Laboratories N.V. (NYSE:CLB), National Beverage Corp. (NASDAQ:FIZZ), and Everbridge, Inc. (NASDAQ:EVBG). All of these stocks’ market caps are closest to ESE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LADR | 12 | 46418 | -1 |
| CLB | 14 | 150203 | -7 |
| FIZZ | 15 | 286562 | -7 |
| EVBG | 27 | 409477 | -1 |
| Average | 17 | 223165 | -4 |
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 $223 million. That figure was $3 million in ESE’s case. Everbridge, Inc. (NASDAQ:EVBG) is the most popular stock in this table. On the other hand Ladder Capital Corp (NYSE:LADR) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks ESCO Technologies Inc. (NYSE:ESE) is even less popular than LADR. Hedge funds clearly dropped the ball on ESE 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 ESE as the stock returned 10.8% 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.
