Were Hedge Funds Right About Encompass Health Corporation (EHC)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Encompass Health Corporation (NYSE:EHC).

Encompass Health Corporation (NYSE:EHC) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 33 hedge funds’ portfolios at the end of the second quarter of 2020. Our calculations also showed that EHC 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). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as ADT Inc. (NYSE:ADT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), and Zai Lab Limited (NASDAQ:ZLAB) to gather more data points. Our calculations also showed that EHC 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.

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 56 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.

Michael Gelband of ExodusPoint Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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. Now we’re going to go over the latest hedge fund action surrounding Encompass Health Corporation (NYSE:EHC).

What have hedge funds been doing with Encompass Health Corporation (NYSE:EHC)?

At second quarter’s end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards EHC over the last 20 quarters. With hedgies’ capital changing hands, 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, Andreas Halvorsen’s Viking Global has the most valuable position in Encompass Health Corporation (NYSE:EHC), worth close to $165.8 million, amounting to 0.7% of its total 13F portfolio. On Viking Global’s heels is Arthur B Cohen and Joseph Healey of Healthcor Management LP, with a $77.2 million position; the fund has 3.2% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism include Kris Jenner, Gordon Bussard, Graham McPhail’s Rock Springs Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Iron Triangle Partners allocated the biggest weight to Encompass Health Corporation (NYSE:EHC), around 8.58% of its 13F portfolio. Healthcor Management LP is also relatively very bullish on the stock, earmarking 3.23 percent of its 13F equity portfolio to EHC.

Due to the fact that Encompass Health Corporation (NYSE:EHC) has witnessed bearish sentiment from the entirety of the hedge funds we track, we can see that there is a sect of funds who were dropping their positions entirely by the end of the second quarter. It’s worth mentioning that Steve Cohen’s Point72 Asset Management sold off the largest investment of the 750 funds watched by Insider Monkey, totaling about $43.6 million in stock. Krishen Sud’s fund, Sivik Global Healthcare, also dropped its stock, about $7.7 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Encompass Health Corporation (NYSE:EHC). These stocks are ADT Inc. (NYSE:ADT), Adaptive Biotechnologies Corporation (NASDAQ:ADPT), Zai Lab Limited (NASDAQ:ZLAB), Jazz Pharmaceuticals Plc (NASDAQ:JAZZ), Ares Capital Corporation (NASDAQ:ARCC), National Retail Properties, Inc. (NYSE:NNN), and Lumentum Holdings Inc (NASDAQ:LITE). All of these stocks’ market caps are similar to EHC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $771 million. That figure was $499 million in EHC’s case. Lumentum Holdings Inc (NASDAQ:LITE) is the most popular stock in this table. On the other hand National Retail Properties, Inc. (NYSE:NNN) is the least popular one with only 17 bullish hedge fund positions. Encompass Health Corporation (NYSE:EHC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for EHC is 67. 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. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately EHC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EHC were disappointed as the stock returned -0.6% since the end of June (through 10/30) 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.