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Hedge Funds Are Dumping Element Solutions Inc. (ESI)

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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Melvin Capital's recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Element Solutions Inc. (NYSE:ESI).

Element Solutions Inc. (NYSE:ESI) has seen a decrease in enthusiasm from smart money of late. Element Solutions Inc. (NYSE:ESI) was in 23 hedge funds' portfolios at the end of June. The all time high for this statistic is 40. Our calculations also showed that ESI isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 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 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.

Jeffrey Gates of Gates Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let's take a look at the key hedge fund action encompassing Element Solutions Inc. (NYSE:ESI).

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

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 -30% from the previous quarter. On the other hand, there were a total of 37 hedge funds with a bullish position in ESI a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

More specifically, Gates Capital Management was the largest shareholder of Element Solutions Inc. (NYSE:ESI), with a stake worth $213.7 million reported as of the end of June. Trailing Gates Capital Management was Iridian Asset Management, which amassed a stake valued at $94 million. Glenview Capital, Royce & Associates, and Locust Wood Capital Advisers 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 Gates Capital Management allocated the biggest weight to Element Solutions Inc. (NYSE:ESI), around 6.16% of its 13F portfolio. Scoggin is also relatively very bullish on the stock, setting aside 5.15 percent of its 13F equity portfolio to ESI.

Seeing as Element Solutions Inc. (NYSE:ESI) has faced falling interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedgies that elected to cut their full holdings heading into Q3. Interestingly, Paul Marshall and Ian Wace's Marshall Wace LLP cut the biggest stake of the "upper crust" of funds watched by Insider Monkey, worth close to $34.7 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also said goodbye to its stock, about $7.2 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 10 funds heading into Q3.

Let's now review hedge fund activity in other stocks similar to Element Solutions Inc. (NYSE:ESI). We will take a look at Amkor Technology, Inc. (NASDAQ:AMKR), Q2 Holdings Inc (NYSE:QTWO), Alteryx, Inc. (NYSE:AYX), Integra Lifesciences Holdings Corp (NASDAQ:IART), Nevro Corp (NYSE:NVRO), Evercore Inc. (NYSE:EVR), and The Chemours Company (NYSE:CC). All of these stocks' market caps match ESI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMKR,19,154546,-1 QTWO,19,208105,-7 AYX,33,782027,-2 IART,19,94167,6 NVRO,26,716353,-3 EVR,31,342871,0 CC,24,562111,-3 Average,24.4,408597,-1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.4 hedge funds with bullish positions and the average amount invested in these stocks was $409 million. That figure was $683 million in ESI's case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand Amkor Technology, Inc. (NASDAQ:AMKR) is the least popular one with only 19 bullish hedge fund positions. Element Solutions Inc. (NYSE:ESI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ESI is 26.5. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and surpassed the market again by 1.6 percentage points. Unfortunately ESI wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); ESI investors were disappointed as the stock returned -2% since the end of June (through 10/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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