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Establishment Labs Holdings Inc. (ESTA): Hedge Fund Sentiment Unchanged

Debasis Saha

With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was Establishment Labs Holdings Inc. (NASDAQ:ESTA).

Establishment Labs Holdings Inc. (NASDAQ:ESTA) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds' portfolios at the end of September. 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 PAR Technology Corporation (NYSE:PAR), Mitek Systems, Inc. (NASDAQ:MITK), and CalAmp Corp. (NASDAQ:CAMP) to gather more data points. Our calculations also showed that ESTA isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_27480" align="alignnone" width="600"] Israel Englander of Millennium Management[/caption]

Izzy Englander of MILLENNIUM MANAGEMENT

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. Let's take a look at the recent hedge fund action surrounding Establishment Labs Holdings Inc. (NASDAQ:ESTA).

Hedge fund activity in Establishment Labs Holdings Inc. (NASDAQ:ESTA)

At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 12 hedge funds held shares or bullish call options in ESTA a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Is ESTA A Good Stock To Buy?

Among these funds, Perceptive Advisors held the most valuable stake in Establishment Labs Holdings Inc. (NASDAQ:ESTA), which was worth $23.8 million at the end of the third quarter. On the second spot was Nantahala Capital Management which amassed $16.1 million worth of shares. Pura Vida Investments, Magnetar Capital, and Millennium Management 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 Pura Vida Investments allocated the biggest weight to Establishment Labs Holdings Inc. (NASDAQ:ESTA), around 4.94% of its 13F portfolio. Perceptive Advisors is also relatively very bullish on the stock, dishing out 0.64 percent of its 13F equity portfolio to ESTA.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Granite Point Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Highland Capital Management).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Establishment Labs Holdings Inc. (NASDAQ:ESTA) but similarly valued. These stocks are PAR Technology Corporation (NYSE:PAR), Mitek Systems, Inc. (NASDAQ:MITK), CalAmp Corp. (NASDAQ:CAMP), and Sierra Wireless, Inc. (NASDAQ:SWIR). This group of stocks' market values are closest to ESTA's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PAR,8,54520,3 MITK,15,39841,-2 CAMP,10,128434,-6 SWIR,12,63843,2 Average,11.25,71660,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $72 million. That figure was $58 million in ESTA's case. Mitek Systems, Inc. (NASDAQ:MITK) is the most popular stock in this table. On the other hand PAR Technology Corporation (NYSE:PAR) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Establishment Labs Holdings Inc. (NASDAQ:ESTA) is even less popular than PAR. Hedge funds clearly dropped the ball on ESTA as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on ESTA as the stock returned 27.7% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

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