Should I Avoid Esquire Financial Holdings, Inc. (ESQ)?

Is Esquire Financial Holdings, Inc. (NASDAQ:ESQ) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Esquire Financial Holdings, Inc. (NASDAQ:ESQ) a buy here? Investors who are in the know were becoming less confident. The number of long hedge fund positions decreased by 1 lately. Esquire Financial Holdings, Inc. (NASDAQ:ESQ) was in 4 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 5. Our calculations also showed that ESQ isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 5 hedge funds in our database with ESQ holdings at the end of June.

Video: 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’ 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 66 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.

Paul Marshall of Marshall Wace

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind we’re going to take a look at the fresh hedge fund action encompassing Esquire Financial Holdings, Inc. (NASDAQ:ESQ).

What have hedge funds been doing with Esquire Financial Holdings, Inc. (NASDAQ:ESQ)?

Heading into the fourth quarter of 2020, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from the second quarter of 2020. On the other hand, there were a total of 4 hedge funds with a bullish position in ESQ a year ago. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Matthew Lindenbaum’s Basswood Capital has the largest position in Esquire Financial Holdings, Inc. (NASDAQ:ESQ), worth close to $11.4 million, amounting to 0.9% of its total 13F portfolio. On Basswood Capital’s heels is Renaissance Technologies,  which holds a $0.3 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors with similar optimism contain Paul Marshall and Ian Wace’s Marshall Wace LLP, Anton Schutz’s Mendon Capital Advisors and . In terms of the portfolio weights assigned to each position Basswood Capital allocated the biggest weight to Esquire Financial Holdings, Inc. (NASDAQ:ESQ), around 0.95% of its 13F portfolio. Mendon Capital Advisors is also relatively very bullish on the stock, earmarking 0.12 percent of its 13F equity portfolio to ESQ.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified ESQ as a viable investment and initiated a position in the stock.

Let’s now review hedge fund activity in other stocks similar to Esquire Financial Holdings, Inc. (NASDAQ:ESQ). We will take a look at Lumos Pharma, Inc. (NASDAQ:LUMO), Babcock & Wilcox Enterprises Inc (NYSE:BW), Safeguard Scientifics, Inc (NYSE:SFE), Natural Gas Services Group, Inc. (NYSE:NGS), Mistras Group, Inc. (NYSE:MG), StoneMor Inc. (NYSE:STON), and Community Bankers Trust Corp. (NASDAQ:ESXB). This group of stocks’ market values are similar to ESQ’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.4 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $12 million in ESQ’s case. Mistras Group, Inc. (NYSE:MG) is the most popular stock in this table. On the other hand StoneMor Inc. (NYSE:STON) is the least popular one with only 3 bullish hedge fund positions. Esquire Financial Holdings, Inc. (NASDAQ:ESQ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ESQ is 33.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. A small number of hedge funds were also right about betting on ESQ as the stock returned 22% since the end of the third quarter (through 11/27) and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.