Is Ellington Financial LLC (NYSE:EFC) a good bet 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.
Ellington Financial LLC (NYSE:EFC) has seen a decrease in support from the world's most elite money managers recently. EFC was in 7 hedge funds' portfolios at the end of the third quarter of 2019. There were 9 hedge funds in our database with EFC positions at the end of the previous quarter. Our calculations also showed that EFC 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.
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 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.
[caption id="attachment_26283" align="alignnone" width="600"] Leon Cooperman of Omega Advisors[/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 review the fresh hedge fund action surrounding Ellington Financial LLC (NYSE:EFC).
What does smart money think about Ellington Financial LLC (NYSE:EFC)?
Heading into the fourth quarter of 2019, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from one quarter earlier. On the other hand, there were a total of 3 hedge funds with a bullish position in EFC a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Ellington Financial LLC (NYSE:EFC) was held by Ellington, which reported holding $18.6 million worth of stock at the end of September. It was followed by Omega Advisors with a $17.3 million position. Other investors bullish on the company included Marshall Wace, Millennium Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Ellington allocated the biggest weight to Ellington Financial LLC (NYSE:EFC), around 3.36% of its 13F portfolio. Omega Advisors is also relatively very bullish on the stock, dishing out 1.03 percent of its 13F equity portfolio to EFC.
Due to the fact that Ellington Financial LLC (NYSE:EFC) has experienced a decline in interest from the entirety of the hedge funds we track, logic holds that there was a specific group of money managers that elected to cut their full holdings by the end of the third quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the biggest investment of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $1.6 million in stock, and Ron Mass's Almitas Capital was right behind this move, as the fund cut about $1 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 2 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks similar to Ellington Financial LLC (NYSE:EFC). We will take a look at Simulations Plus, Inc. (NASDAQ:SLP), Evolent Health Inc (NYSE:EVH), United Natural Foods, Inc. (NASDAQ:UNFI), and Agilysys, Inc. (NASDAQ:AGYS). This group of stocks' market caps resemble EFC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SLP,14,40148,5 EVH,16,115507,0 UNFI,10,35452,-4 AGYS,16,128890,3 Average,14,79999,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $47 million in EFC's case. Evolent Health Inc (NYSE:EVH) is the most popular stock in this table. On the other hand United Natural Foods, Inc. (NASDAQ:UNFI) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Ellington Financial LLC (NYSE:EFC) is even less popular than UNFI. Hedge funds dodged a bullet by taking a bearish stance towards EFC. 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 EFC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); EFC investors were disappointed as the stock returned 1.8% 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.