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Is Energy Recovery, Inc. (ERII) A Good Stock To Buy?

Debasis Saha

How do we determine whether Energy Recovery, Inc. (NASDAQ:ERII) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Energy Recovery, Inc. (NASDAQ:ERII) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 10 hedge funds' portfolios at the end of September. At the end of this article we will also compare ERII to other stocks including Ethan Allen Interiors Inc. (NYSE:ETH), Changyou.Com Ltd (NASDAQ:CYOU), and Gores Metropoulos, Inc. (NASDAQ:GMHI) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/caption]

Chuck Royce

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to take a peek at the key hedge fund action surrounding Energy Recovery, Inc. (NASDAQ:ERII).

Hedge fund activity in Energy Recovery, Inc. (NASDAQ:ERII)

At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 10 hedge funds with a bullish position in ERII a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ERII A Good Stock To Buy?

More specifically, Trigran Investments was the largest shareholder of Energy Recovery, Inc. (NASDAQ:ERII), with a stake worth $34.9 million reported as of the end of September. Trailing Trigran Investments was 683 Capital Partners, which amassed a stake valued at $9 million. Royce & Associates, Renaissance Technologies, and Elkhorn 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 Trigran Investments allocated the biggest weight to Energy Recovery, Inc. (NASDAQ:ERII), around 6.59% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, setting aside 1 percent of its 13F equity portfolio to ERII.

Since Energy Recovery, Inc. (NASDAQ:ERII) has witnessed a decline in interest from the smart money, we can see that there is a sect of money managers who sold off their positions entirely by the end of the third quarter. At the top of the heap, Richard Driehaus's Driehaus Capital cut the biggest position of all the hedgies watched by Insider Monkey, comprising an estimated $3.1 million in stock. Israel Englander's fund, Millennium Management, also sold off its stock, about $0.7 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Energy Recovery, Inc. (NASDAQ:ERII) but similarly valued. We will take a look at Ethan Allen Interiors Inc. (NYSE:ETH), Changyou.Com Ltd (NASDAQ:CYOU), Gores Metropoulos, Inc. (NASDAQ:GMHI), and Blue Bird Corporation (NASDAQ:BLBD). All of these stocks' market caps are closest to ERII's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ETH,14,62893,-2 CYOU,13,38009,4 GMHI,19,163294,-1 BLBD,7,57343,2 Average,13.25,80385,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $48 million in ERII's case. Gores Metropoulos, Inc. (NASDAQ:GMHI) is the most popular stock in this table. On the other hand Blue Bird Corporation (NASDAQ:BLBD) is the least popular one with only 7 bullish hedge fund positions. Energy Recovery, Inc. (NASDAQ:ERII) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ERII wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ERII investors were disappointed as the stock returned -6% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.

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

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