Were Hedge Funds Right About Ditching The Estee Lauder Companies Inc (EL)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of The Estee Lauder Companies Inc (NYSE:EL) based on that data and determine whether they were really smart about the stock.

Is The Estee Lauder Companies Inc (NYSE:EL) a bargain? Hedge funds were reducing their bets on the stock. The number of bullish hedge fund positions fell by 6 in recent months. Our calculations also showed that EL isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Rajiv Jain of GQG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to go over the recent hedge fund action encompassing The Estee Lauder Companies Inc (NYSE:EL).

What does smart money think about The Estee Lauder Companies Inc (NYSE:EL)?

Heading into the second quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from one quarter earlier. On the other hand, there were a total of 39 hedge funds with a bullish position in EL a year ago. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in The Estee Lauder Companies Inc (NYSE:EL), which was worth $227.8 million at the end of the third quarter. On the second spot was Ako Capital which amassed $185.1 million worth of shares. GQG Partners, Renaissance Technologies, and Melvin Capital 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 Bristol Gate Capital Partners allocated the biggest weight to The Estee Lauder Companies Inc (NYSE:EL), around 4.54% of its 13F portfolio. Ako Capital is also relatively very bullish on the stock, dishing out 3.9 percent of its 13F equity portfolio to EL.

Judging by the fact that The Estee Lauder Companies Inc (NYSE:EL) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few hedgies that slashed their full holdings by the end of the first quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dumped the biggest stake of the 750 funds watched by Insider Monkey, totaling close to $74 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $24.1 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 6 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as The Estee Lauder Companies Inc (NYSE:EL) but similarly valued. We will take a look at The Southern Company (NYSE:SO), Colgate-Palmolive Company (NYSE:CL), Rio Tinto Group (NYSE:RIO), and Zoetis Inc (NYSE:ZTS). This group of stocks’ market caps are similar to EL’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.5 hedge funds with bullish positions and the average amount invested in these stocks was $1390 million. That figure was $1074 million in EL’s case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 20 bullish hedge fund positions. The Estee Lauder Companies Inc (NYSE:EL) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately EL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EL were disappointed as the stock returned 18.4% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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