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In this article we are going to use hedge fund sentiment as a tool and determine whether Element Solutions Inc. (NYSE:ESI) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Element Solutions Inc. (NYSE:ESI) shareholders have witnessed an increase in hedge fund sentiment in recent months. Element Solutions Inc. (NYSE:ESI) was in 33 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 40. There were 29 hedge funds in our database with ESI positions at the end of the fourth quarter. Our calculations also showed that ESI isn't among the 30 most popular stocks among hedge funds (click for Q1 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 115 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 we're going to take a gander 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 first quarter's end, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from one quarter earlier. By comparison, 35 hedge funds held shares or bullish call options in ESI a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Gates Capital Management was the largest shareholder of Element Solutions Inc. (NYSE:ESI), with a stake worth $165.4 million reported as of the end of March. Trailing Gates Capital Management was Glenview Capital, which amassed a stake valued at $70 million. Iridian Asset Management, 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 Scoggin allocated the biggest weight to Element Solutions Inc. (NYSE:ESI), around 6.46% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, dishing out 6.02 percent of its 13F equity portfolio to ESI.
As aggregate interest increased, key money managers have jumped into Element Solutions Inc. (NYSE:ESI) headfirst. Sciencast Management, managed by Qing Li, initiated the biggest position in Element Solutions Inc. (NYSE:ESI). Sciencast Management had $1.3 million invested in the company at the end of the quarter. Javier Velazquez's Albar Capital also made a $1.2 million investment in the stock during the quarter. The other funds with brand new ESI positions are Mika Toikka's AlphaCrest Capital Management, Greg Eisner's Engineers Gate Manager, and Bruce Kovner's Caxton Associates LP.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Element Solutions Inc. (NYSE:ESI) but similarly valued. These stocks are DCP Midstream LP (NYSE:DCP), Simpson Manufacturing Co, Inc. (NYSE:SSD), Semtech Corporation (NASDAQ:SMTC), Open Lending Corporation (NASDAQ:LPRO), Sonos, Inc. (NASDAQ:SONO), Qurate Retail, Inc. (NASDAQ:QRTEA), and Home Bancshares, Inc. (Conway, AR) (NASDAQ:HOMB). All of these stocks' market caps are closest to ESI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DCP,4,20645,1 SSD,25,239346,0 SMTC,21,209600,4 LPRO,33,511506,-1 SONO,46,763124,3 QRTEA,31,776294,-5 HOMB,6,48515,-6 Average,23.7,367004,-0.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.7 hedge funds with bullish positions and the average amount invested in these stocks was $367 million. That figure was $624 million in ESI's case. Sonos, Inc. (NASDAQ:SONO) is the most popular stock in this table. On the other hand DCP Midstream LP (NYSE:DCP) is the least popular one with only 4 bullish hedge fund positions. Element Solutions Inc. (NYSE:ESI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ESI is 68.3. 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. 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 22.8% in 2021 through July 2nd and still beat the market by 6 percentage points. Hedge funds were also right about betting on ESI as the stock returned 31% since the end of Q1 (through 7/2) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.