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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Emcor Group Inc (NYSE:EME) and determine whether hedge funds had an edge regarding this stock.
Emcor Group Inc (NYSE:EME) shareholders have witnessed a decrease in support from the world's most elite money managers recently. EME was in 24 hedge funds' portfolios at the end of March. There were 29 hedge funds in our database with EME holdings at the end of the previous quarter. Our calculations also showed that EME 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.
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Clint Carlson of Carlson Capital[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let's take a peek at the new hedge fund action regarding Emcor Group Inc (NYSE:EME).
Hedge fund activity in Emcor Group Inc (NYSE:EME)
At Q1's end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in EME over the last 18 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the number one position in Emcor Group Inc (NYSE:EME). AQR Capital Management has a $62.8 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is Clint Carlson of Carlson Capital, with a $31 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that hold long positions contain Alexander Medina Seaver's Stadium Capital Management, Noam Gottesman's GLG Partners and Renaissance Technologies. In terms of the portfolio weights assigned to each position Stadium Capital Management allocated the biggest weight to Emcor Group Inc (NYSE:EME), around 13.02% of its 13F portfolio. Value Holdings LP is also relatively very bullish on the stock, setting aside 5.11 percent of its 13F equity portfolio to EME.
Judging by the fact that Emcor Group Inc (NYSE:EME) has experienced falling interest from hedge fund managers, it's safe to say that there was a specific group of hedge funds who were dropping their entire stakes last quarter. It's worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the largest stake of the "upper crust" of funds tracked by Insider Monkey, totaling about $16.6 million in stock. Donald Sussman's fund, Paloma Partners, also sold off its stock, about $1.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 5 funds last quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Emcor Group Inc (NYSE:EME) but similarly valued. These stocks are Ormat Technologies, Inc. (NYSE:ORA), Schneider National, Inc. (NYSE:SNDR), Enstar Group Ltd. (NASDAQ:ESGR), and Houlihan Lokey Inc (NYSE:HLI). This group of stocks' market values are closest to EME's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ORA,9,164907,-7 SNDR,22,66577,0 ESGR,11,339675,-2 HLI,15,133644,5 Average,14.25,176201,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $176 million. That figure was $201 million in EME's case. Schneider National, Inc. (NYSE:SNDR) is the most popular stock in this table. On the other hand Ormat Technologies, Inc. (NYSE:ORA) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Emcor Group Inc (NYSE:EME) is more popular among hedge funds. 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 and still beat the market by 15.5 percentage points. Unfortunately EME wasn't nearly as popular as these 10 stocks and hedge funds that were betting on EME were disappointed as the stock returned 8% during the second quarter 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.