Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
Essent Group Ltd (NYSE:ESNT) was in 27 hedge funds’ portfolios at the end of March. ESNT investors should pay attention to a decrease in hedge fund interest of late. There were 28 hedge funds in our database with ESNT holdings at the end of the previous quarter. Our calculations also showed that esnt isn’t among the 30 most popular stocks among hedge funds.
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’ 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Noam Gottesman, GLG Partners
We’re going to take a glance at the new hedge fund action encompassing Essent Group Ltd (NYSE:ESNT).
What does the smart money think about Essent Group Ltd (NYSE:ESNT)?
Heading into the second quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the fourth quarter of 2018. By comparison, 27 hedge funds held shares or bullish call options in ESNT 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.
More specifically, Polar Capital was the largest shareholder of Essent Group Ltd (NYSE:ESNT), with a stake worth $71.7 million reported as of the end of March. Trailing Polar Capital was GLG Partners, which amassed a stake valued at $66.1 million. Renaissance Technologies, Millennium Management, and D E Shaw were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Essent Group Ltd (NYSE:ESNT) has faced falling interest from the smart money, logic holds that there were a few money managers who were dropping their positions entirely heading into Q3. Intriguingly, Anand Parekh’s Alyeska Investment Group cut the largest stake of all the hedgies followed by Insider Monkey, comprising about $11.4 million in stock. Michael Hintze’s fund, CQS Cayman LP, also sold off its stock, about $2.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds heading into Q3.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Essent Group Ltd (NYSE:ESNT) but similarly valued. We will take a look at Pinnacle Financial Partners, Inc. (NASDAQ:PNFP), ALLETE Inc (NYSE:ALE), SINA Corp (NASDAQ:SINA), and Amneal Pharmaceuticals, Inc. (NYSE:AMRX). This group of stocks’ market valuations are similar to ESNT’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PNFP | 15 | 87922 | 0 |
| ALE | 18 | 246797 | 0 |
| SINA | 24 | 474870 | 3 |
| AMRX | 8 | 27694 | 0 |
| Average | 16.25 | 209321 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $209 million. That figure was $310 million in ESNT’s case. SINA Corp (NASDAQ:SINA) is the most popular stock in this table. On the other hand Amneal Pharmaceuticals, Inc. (NYSE:AMRX) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Essent Group Ltd (NYSE:ESNT) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on ESNT as the stock returned 9.3% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
