Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Elbit Systems Ltd. (NASDAQ:ESLT) changed recently.
Elbit Systems Ltd. (NASDAQ:ESLT) has experienced a decrease in enthusiasm from smart money recently. Our calculations also showed that ESLT 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.
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_26357" align="aligncenter" width="359"] Ken Fisher of Fisher Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to take a gander at the fresh hedge fund action surrounding Elbit Systems Ltd. (NASDAQ:ESLT).
Hedge fund activity in Elbit Systems Ltd. (NASDAQ:ESLT)
At Q3's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -40% from the previous quarter. By comparison, 2 hedge funds held shares or bullish call options in ESLT a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Elbit Systems Ltd. (NASDAQ:ESLT), with a stake worth $13 million reported as of the end of September. Trailing Renaissance Technologies was Fisher Asset Management, which amassed a stake valued at $2.4 million. D E Shaw was 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 Renaissance Technologies allocated the biggest weight to Elbit Systems Ltd. (NASDAQ:ESLT), around 0.01% of its 13F portfolio. Fisher Asset Management is also relatively very bullish on the stock, dishing out 0.0026 percent of its 13F equity portfolio to ESLT.
Seeing as Elbit Systems Ltd. (NASDAQ:ESLT) has witnessed falling interest from the smart money, it's safe to say that there were a few money managers that elected to cut their positions entirely in the third quarter. It's worth mentioning that Israel Englander's Millennium Management dropped the biggest investment of all the hedgies monitored by Insider Monkey, worth close to $3 million in stock. Michael Gelband's fund, ExodusPoint Capital, also said goodbye to its stock, about $0.3 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 2 funds in the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Elbit Systems Ltd. (NASDAQ:ESLT) but similarly valued. We will take a look at Brookfield Renewable Partners L.P. (NYSE:BEP), Jazz Pharmaceuticals plc (NASDAQ:JAZZ), Mobile TeleSystems Public Joint Stock Company (NYSE:MBT), and SAGE Therapeutics Inc (NASDAQ:SAGE). This group of stocks' market valuations resemble ESLT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BEP,4,7529,0 JAZZ,25,837365,5 MBT,14,403283,6 SAGE,29,430454,4 Average,18,419658,3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $420 million. That figure was $16 million in ESLT's case. SAGE Therapeutics Inc (NASDAQ:SAGE) is the most popular stock in this table. On the other hand Brookfield Renewable Partners L.P. (NYSE:BEP) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Elbit Systems Ltd. (NASDAQ:ESLT) is even less popular than BEP. Hedge funds dodged a bullet by taking a bearish stance towards ESLT. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ESLT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ESLT investors were disappointed as the stock returned 0.3% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.