Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Encompass Health Corporation (NYSE:EHC).
Encompass Health Corporation (NYSE:EHC) was in 23 hedge funds' portfolios at the end of the second quarter of 2019. EHC shareholders have witnessed a decrease in support from the world's most elite money managers recently. There were 24 hedge funds in our database with EHC positions at the end of the previous quarter. Our calculations also showed that EHC isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to check out the new hedge fund action regarding Encompass Health Corporation (NYSE:EHC).
How are hedge funds trading Encompass Health Corporation (NYSE:EHC)?
At the end of the second quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in EHC over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Encompass Health Corporation (NYSE:EHC), with a stake worth $70 million reported as of the end of March. Trailing Renaissance Technologies was Point72 Asset Management, which amassed a stake valued at $67.1 million. D E Shaw, Millennium Management, and Rock Springs Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that Encompass Health Corporation (NYSE:EHC) has experienced bearish sentiment from hedge fund managers, it's easy to see that there is a sect of fund managers who sold off their entire stakes heading into Q3. Interestingly, Mariko Gordon's Daruma Asset Management said goodbye to the largest position of the 750 funds monitored by Insider Monkey, worth close to $24.7 million in stock, and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital was right behind this move, as the fund sold off about $4.3 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 1 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Encompass Health Corporation (NYSE:EHC) but similarly valued. We will take a look at Gentex Corporation (NASDAQ:GNTX), Phillips 66 Partners LP (NYSE:PSXP), Morningstar, Inc. (NASDAQ:MORN), and Mellanox Technologies, Ltd. (NASDAQ:MLNX). This group of stocks' market valuations are closest to EHC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GNTX,23,388264,0 PSXP,3,9904,-1 MORN,20,265985,-1 MLNX,39,1425612,-2 Average,21.25,522441,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $522 million. That figure was $507 million in EHC's case. Mellanox Technologies, Ltd. (NASDAQ:MLNX) is the most popular stock in this table. On the other hand Phillips 66 Partners LP (NYSE:PSXP) is the least popular one with only 3 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. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately EHC wasn't nearly as popular as these 20 stocks and hedge funds that were betting on EHC were disappointed as the stock returned 0.3% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 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.