Was The Smart Money Right About Eagle Materials, Inc. (EXP)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Eagle Materials, Inc. (NYSE:EXP) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Eagle Materials, Inc. (NYSE:EXP) worth your attention right now? Prominent investors were buying. The number of bullish hedge fund bets advanced by 7 recently. Eagle Materials, Inc. (NYSE:EXP) was in 41 hedge funds’ portfolios at the end of June. The all time high for this statistics is 40. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that EXP isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 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.

Scott Ferguson of Sachem Head Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to go over the fresh hedge fund action encompassing Eagle Materials, Inc. (NYSE:EXP).

What have hedge funds been doing with Eagle Materials, Inc. (NYSE:EXP)?

At second quarter’s end, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 36 hedge funds with a bullish position in EXP a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Sachem Head Capital held the most valuable stake in Eagle Materials, Inc. (NYSE:EXP), which was worth $214.5 million at the end of the third quarter. On the second spot was Empyrean Capital Partners which amassed $34.3 million worth of shares. Sunriver Management, Broad Bay Capital, and Citadel Investment Group 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 Sachem Head Capital allocated the biggest weight to Eagle Materials, Inc. (NYSE:EXP), around 15.28% of its 13F portfolio. Cobalt Capital Management is also relatively very bullish on the stock, designating 7.23 percent of its 13F equity portfolio to EXP.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into Eagle Materials, Inc. (NYSE:EXP) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, created the most valuable position in Eagle Materials, Inc. (NYSE:EXP). Adage Capital Management had $13.3 million invested in the company at the end of the quarter. Wayne Cooperman’s Cobalt Capital Management also made a $12.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital, Israel Englander’s Millennium Management, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Let’s also examine hedge fund activity in other stocks similar to Eagle Materials, Inc. (NYSE:EXP). We will take a look at Verint Systems Inc. (NASDAQ:VRNT), Lexington Realty Trust (NYSE:LXP), Karuna Therapeutics, Inc. (NASDAQ:KRTX), Fate Therapeutics Inc (NASDAQ:FATE), Viavi Solutions Inc (NASDAQ:VIAV), American States Water Co (NYSE:AWR), and Saia Inc (NASDAQ:SAIA). This group of stocks’ market values resemble EXP’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.1 hedge funds with bullish positions and the average amount invested in these stocks was $288 million. That figure was $429 million in EXP’s case. Fate Therapeutics Inc (NASDAQ:FATE) is the most popular stock in this table. On the other hand Lexington Realty Trust (NYSE:LXP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Eagle Materials, Inc. (NYSE:EXP) is more popular among hedge funds. Our overall hedge fund sentiment score for EXP is 90. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on EXP as the stock returned 29.9% since the end of June (through 10/23) 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.