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Is Eastman Chemical Company (EMN) Going to Burn These Hedge Funds?

Asma UL Husna
·6 mins read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Eastman Chemical Company (NYSE:EMN) and determine whether hedge funds had an edge regarding this stock.

Is Eastman Chemical Company (NYSE:EMN) a buy here? Prominent investors were cutting their exposure. The number of bullish hedge fund bets were trimmed by 2 recently. Eastman Chemical Company (NYSE:EMN) was in 27 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 40. Our calculations also showed that EMN 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.

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 58 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.

Dmitry Balyasny of Balyasny Asset Managemnet
Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 let's take a look at the fresh hedge fund action encompassing Eastman Chemical Company (NYSE:EMN).

Hedge fund activity in Eastman Chemical Company (NYSE:EMN)

Heading into the third quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in EMN a year ago. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, GMT Capital was the largest shareholder of Eastman Chemical Company (NYSE:EMN), with a stake worth $52.4 million reported as of the end of September. Trailing GMT Capital was AQR Capital Management, which amassed a stake valued at $49.5 million. Scopus Asset Management, Balyasny Asset Management, 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 Atlantic Investment Management allocated the biggest weight to Eastman Chemical Company (NYSE:EMN), around 3.42% of its 13F portfolio. GMT Capital is also relatively very bullish on the stock, setting aside 2.95 percent of its 13F equity portfolio to EMN.

Due to the fact that Eastman Chemical Company (NYSE:EMN) has witnessed falling interest from the smart money, logic holds that there is a sect of hedgies that decided to sell off their positions entirely in the second quarter. Interestingly, Ken Griffin's Citadel Investment Group dumped the biggest investment of the 750 funds monitored by Insider Monkey, totaling about $13.6 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also cut its stock, about $6.6 million worth. These moves are interesting, as total hedge fund interest was cut by 2 funds in the second quarter.

Let's now review hedge fund activity in other stocks similar to Eastman Chemical Company (NYSE:EMN). These stocks are Raymond James Financial, Inc. (NYSE:RJF), Allegion plc (NYSE:ALLE), Quidel Corporation (NASDAQ:QDEL), CenterPoint Energy, Inc. (NYSE:CNP), Annaly Capital Management, Inc. (NYSE:NLY), PPD, Inc. (NASDAQ:PPD), and Lamb Weston Holdings, Inc. (NYSE:LW). This group of stocks' market values match EMN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RJF,35,436156,4 ALLE,29,424856,-2 QDEL,32,282861,10 CNP,30,480314,-2 NLY,21,288668,-6 PPD,27,620340,0 LW,25,189982,-4 Average,28.4,389025,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.4 hedge funds with bullish positions and the average amount invested in these stocks was $389 million. That figure was $185 million in EMN's case. Raymond James Financial, Inc. (NYSE:RJF) is the most popular stock in this table. On the other hand Annaly Capital Management, Inc. (NYSE:NLY) is the least popular one with only 21 bullish hedge fund positions. Eastman Chemical Company (NYSE:EMN) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for EMN is 44.7. 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 gained 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. A small number of hedge funds were also right about betting on EMN as the stock returned 11.9% since the end of June (through September 25th) and outperformed the market by an even larger margin.

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

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