Is Earthstone Energy, Inc. (NYSE:ESTE) a good equity to bet on right now? We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Earthstone Energy, Inc. (NYSE:ESTE) a healthy stock for your portfolio? Investors who are in the know are becoming hopeful. The number of long hedge fund positions improved by 1 recently. Our calculations also showed that ESTE 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_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/caption]
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 check out the fresh hedge fund action regarding Earthstone Energy, Inc. (NYSE:ESTE).
What have hedge funds been doing with Earthstone Energy, Inc. (NYSE:ESTE)?
At Q3's end, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the previous quarter. By comparison, 5 hedge funds held shares or bullish call options in ESTE a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the number one position in Earthstone Energy, Inc. (NYSE:ESTE). Citadel Investment Group has a $0.2 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is D E Shaw, managed by David E. Shaw, which holds a $0.2 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other peers that are bullish contain Frederick Tucker Golden's Solas Capital Management, David Harding's Winton Capital Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Solas Capital Management allocated the biggest weight to Earthstone Energy, Inc. (NYSE:ESTE), around 0.17% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, earmarking 0.001 percent of its 13F equity portfolio to ESTE.
Now, some big names have been driving this bullishness. Solas Capital Management, managed by Frederick Tucker Golden, assembled the largest position in Earthstone Energy, Inc. (NYSE:ESTE). Solas Capital Management had $0.2 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $0.1 million position during the quarter. The only other fund with a new position in the stock is Paul Marshall and Ian Wace's Marshall Wace.
Let's now take a look at hedge fund activity in other stocks similar to Earthstone Energy, Inc. (NYSE:ESTE). We will take a look at Stereotaxis Inc (NYSE:STXS), First Business Financial Services Inc (NASDAQ:FBIZ), Americas Gold and Silver Corporation (NYSE:USAS), and Galectin Therapeutics Inc. (NASDAQ:GALT). This group of stocks' market valuations match ESTE's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STXS,7,90884,6 FBIZ,3,6962,1 USAS,3,1836,1 GALT,5,332,1 Average,4.5,25004,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 4.5 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $1 million in ESTE's case. Stereotaxis Inc (NYSE:STXS) is the most popular stock in this table. On the other hand First Business Financial Services Inc (NASDAQ:FBIZ) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Earthstone Energy, Inc. (NYSE:ESTE) is more popular among hedge funds. 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. Hedge funds were also right about betting on ESTE as the stock returned 37.5% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.