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Is EHC A Good Stock To Buy According To Hedge Funds?

Debasis Saha
·6 min read

Is Encompass Health Corporation (NYSE:EHC) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is EHC a good stock to buy? The best stock pickers were getting less optimistic. The number of bullish hedge fund bets decreased by 1 lately. Encompass Health Corporation (NYSE:EHC) was in 32 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 33. Our calculations also showed that EHC isn't among the 30 most popular stocks among hedge funds (click for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Barry Rosenstein - Jana Partners
Barry Rosenstein - Jana Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. Keeping this in mind we're going to take a glance at the fresh hedge fund action regarding Encompass Health Corporation (NYSE:EHC).

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

At third quarter's end, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in EHC a year ago. With the smart money's sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Is EHC A Good Stock To Buy?
Is EHC A Good Stock To Buy?

Among these funds, Viking Global held the most valuable stake in Encompass Health Corporation (NYSE:EHC), which was worth $215.5 million at the end of the third quarter. On the second spot was JANA Partners which amassed $113.2 million worth of shares. Citadel Investment Group, Rock Springs Capital Management, and Iron Triangle Partners 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 Iron Triangle Partners allocated the biggest weight to Encompass Health Corporation (NYSE:EHC), around 10.13% of its 13F portfolio. JANA Partners is also relatively very bullish on the stock, setting aside 10.12 percent of its 13F equity portfolio to EHC.

Because Encompass Health Corporation (NYSE:EHC) has witnessed bearish sentiment from hedge fund managers, we can see that there lies a certain "tier" of fund managers that slashed their positions entirely heading into Q4. It's worth mentioning that Arthur B Cohen and Joseph Healey's Healthcor Management LP cut the biggest investment of all the hedgies followed by Insider Monkey, worth close to $77.2 million in stock, and Michael Rockefeller and KarláKroeker's Woodline Partners was right behind this move, as the fund sold off about $6.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds heading into Q4.

Let's now take a look at hedge fund activity in other stocks similar to Encompass Health Corporation (NYSE:EHC). We will take a look at Churchill Downs Incorporated (NASDAQ:CHDN), Regency Centers Corp (NYSE:REG), Ritchie Bros. Auctioneers (NYSE:RBA), Vornado Realty Trust (NYSE:VNO), Kingsoft Cloud Holdings Limited (NASDAQ:KC), Reynolds Consumer Products Inc. (NASDAQ:REYN), and Berry Global Group Inc (NYSE:BERY). This group of stocks' market caps are closest to EHC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CHDN,28,511671,3 REG,23,174342,8 RBA,21,495118,4 VNO,20,141724,3 KC,29,161641,9 REYN,18,239807,1 BERY,43,1263030,3 Average,26,426762,4.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $427 million. That figure was $612 million in EHC's case. Berry Global Group Inc (NYSE:BERY) is the most popular stock in this table. On the other hand Reynolds Consumer Products Inc. (NASDAQ:REYN) is the least popular one with only 18 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 61.1. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on EHC as the stock returned 26.4% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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