Was The Smart Money Right About Elanco Animal Health Incorporated (ELAN)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Elanco Animal Health Incorporated (NYSE:ELAN) and determine whether hedge funds skillfully traded this stock.

Elanco Animal Health Incorporated (NYSE:ELAN) has seen a decrease in support from the world’s most elite money managers recently. Elanco Animal Health Incorporated (NYSE:ELAN) was in 32 hedge funds’ portfolios at the end of September. The all time high for this statistic is 43. Our calculations also showed that ELAN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we’re going to view the latest hedge fund action surrounding Elanco Animal Health Incorporated (NYSE:ELAN).

Do Hedge Funds Think ELAN Is A Good Stock To Buy Now?

At Q3’s end, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -24% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ELAN over the last 25 quarters. So, let’s see 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 Elanco Animal Health Incorporated (NYSE:ELAN), which was worth $887.7 million at the end of the third quarter. On the second spot was Starboard Value LP which amassed $233.2 million worth of shares. Sculptor Capital, Dendur Capital, and Senator 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 Elanco Animal Health Incorporated (NYSE:ELAN), around 21.89% of its 13F portfolio. Dendur Capital is also relatively very bullish on the stock, earmarking 16.08 percent of its 13F equity portfolio to ELAN.

Because Elanco Animal Health Incorporated (NYSE:ELAN) has faced bearish sentiment from hedge fund managers, we can see that there lies a certain “tier” of money managers who were dropping their entire stakes heading into Q4. Interestingly, Phill Gross and Robert Atchinson’s Adage Capital Management cut the largest stake of the “upper crust” of funds tracked by Insider Monkey, totaling an estimated $34.7 million in stock. Simon Sadler’s fund, Segantii Capital, also sold off its stock, about $20.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 10 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Elanco Animal Health Incorporated (NYSE:ELAN). We will take a look at Check Point Software Technologies Ltd. (NASDAQ:CHKP), Doximity Inc. (NYSE:DOCS), Franklin Resources, Inc. (NYSE:BEN), Masimo Corporation (NASDAQ:MASI), Logitech International SA (NASDAQ:LOGI), FactSet Research Systems Inc. (NYSE:FDS), and Huazhu Group Limited (NASDAQ:HTHT). All of these stocks’ market caps resemble ELAN’s market cap.

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As you can see these stocks had an average of 26.3 hedge funds with bullish positions and the average amount invested in these stocks was $578 million. That figure was $1850 million in ELAN’s case. Masimo Corporation (NASDAQ:MASI) is the most popular stock in this table. On the other hand Doximity Inc. (NYSE:DOCS) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Elanco Animal Health Incorporated (NYSE:ELAN) is more popular among hedge funds. Our overall hedge fund sentiment score for ELAN is 67.3. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and still beat the market by 3.6 percentage points. Unfortunately, ELAN wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on ELAN were disappointed as the stock returned -18.3% since the end of the third quarter (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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

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