The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Energy Recovery, Inc. (NASDAQ:ERII) and determine whether the smart money was really smart about this stock.
Energy Recovery, Inc. (NASDAQ:ERII) investors should be aware of an increase in hedge fund sentiment in recent months. ERII was in 11 hedge funds' portfolios at the end of the first quarter of 2020. There were 7 hedge funds in our database with ERII positions at the end of the previous quarter. Our calculations also showed that ERII isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: 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 S&P 500 ETFs by more than 58 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. 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_26340" align="aligncenter" width="400"] Ken Griffin of Citadel Investment Group[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's take a look at the new hedge fund action regarding Energy Recovery, Inc. (NASDAQ:ERII).
How are hedge funds trading Energy Recovery, Inc. (NASDAQ:ERII)?
At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 57% from the fourth quarter of 2019. On the other hand, there were a total of 9 hedge funds with a bullish position in ERII a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Trigran Investments was the largest shareholder of Energy Recovery, Inc. (NASDAQ:ERII), with a stake worth $38.5 million reported as of the end of September. Trailing Trigran Investments was 683 Capital Partners, which amassed a stake valued at $3.9 million. Royce & Associates, Arrowstreet Capital, and Elkhorn Partners 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 Trigran Investments allocated the biggest weight to Energy Recovery, Inc. (NASDAQ:ERII), around 8.46% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, setting aside 0.46 percent of its 13F equity portfolio to ERII.
As aggregate interest increased, some big names have jumped into Energy Recovery, Inc. (NASDAQ:ERII) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most outsized position in Energy Recovery, Inc. (NASDAQ:ERII). Arrowstreet Capital had $0.9 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also made a $0.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Greg Eisner's Engineers Gate Manager and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.
Let's now take a look at hedge fund activity in other stocks similar to Energy Recovery, Inc. (NASDAQ:ERII). These stocks are BioSpecifics Technologies Corp. (NASDAQ:BSTC), First Community Bancshares Inc (NASDAQ:FCBC), AxoGen, Inc. (NASDAQ:AXGN), and Prevail Therapeutics Inc. (NASDAQ:PRVL). This group of stocks' market values are closest to ERII's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BSTC,9,52752,-2 FCBC,5,8715,-2 AXGN,10,62386,-5 PRVL,12,269275,4 Average,9,98282,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $98 million. That figure was $46 million in ERII's case. Prevail Therapeutics Inc. (NASDAQ:PRVL) is the most popular stock in this table. On the other hand First Community Bancshares Inc (NASDAQ:FCBC) is the least popular one with only 5 bullish hedge fund positions. Energy Recovery, Inc. (NASDAQ:ERII) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ERII wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ERII were disappointed as the stock returned 2.2% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.