Elbit Systems Ltd. (ESLT) Fell Out Of Favor With Hedge Funds

·6 min read

While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Elbit Systems Ltd. (NASDAQ:ESLT).

Is Elbit Systems Ltd. (NASDAQ:ESLT) the right pick for your portfolio? The smart money was in a bearish mood. The number of long hedge fund bets went down by 2 in recent months. Elbit Systems Ltd. (NASDAQ:ESLT) was in 3 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 9. Our calculations also showed that ESLT 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.

Cathie Wood ARK Investment Management
Cathie Wood ARK Investment Management

Cathie Wood of ARK Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund wants to buy this $26 biotech stock for $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery 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. Keeping this in mind we're going to go over the new hedge fund action regarding Elbit Systems Ltd. (NASDAQ:ESLT).

Do Hedge Funds Think ESLT Is A Good Stock To Buy Now?

At first quarter's end, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -40% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ESLT over the last 23 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Catherine D. Wood's ARK Investment Management has the biggest position in Elbit Systems Ltd. (NASDAQ:ESLT), worth close to $49.2 million, corresponding to 0.1% of its total 13F portfolio. The second largest stake is held by Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $0.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. In terms of the portfolio weights assigned to each position ARK Investment Management allocated the biggest weight to Elbit Systems Ltd. (NASDAQ:ESLT), around 0.1% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, setting aside 0.02 percent of its 13F equity portfolio to ESLT.

Since Elbit Systems Ltd. (NASDAQ:ESLT) has experienced declining sentiment from the smart money, we can see that there is a sect of hedgies that slashed their full holdings last quarter. Interestingly, Seth Cogswell's Running Oak Capital said goodbye to the largest investment of the 750 funds followed by Insider Monkey, comprising about $3 million in stock. Israel Englander's fund, Millennium Management, also dropped its stock, about $2.5 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 2 funds last quarter.

Let's now review hedge fund activity in other stocks similar to Elbit Systems Ltd. (NASDAQ:ESLT). We will take a look at Pan American Silver Corp. (NASDAQ:PAAS), YETI Holdings, Inc. (NYSE:YETI), BlackLine, Inc. (NASDAQ:BL), Terminix Global Holdings, Inc. (NYSE:TMX), Sana Biotechnology, Inc. (NASDAQ:SANA), BWX Technologies Inc (NYSE:BWXT), and Reynolds Consumer Products Inc. (NASDAQ:REYN). This group of stocks' market values are closest to ESLT's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PAAS,27,352324,0 YETI,30,159366,11 BL,24,271832,1 TMX,27,456007,-3 SANA,15,158923,15 BWXT,16,154661,-3 REYN,19,153098,1 Average,22.6,243744,3.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.6 hedge funds with bullish positions and the average amount invested in these stocks was $244 million. That figure was $50 million in ESLT's case. YETI Holdings, Inc. (NYSE:YETI) is the most popular stock in this table. On the other hand Sana Biotechnology, Inc. (NASDAQ:SANA) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Elbit Systems Ltd. (NASDAQ:ESLT) is even less popular than SANA. Our overall hedge fund sentiment score for ESLT is 13. 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. Hedge funds dodged a bullet by taking a bearish stance towards ESLT. Our calculations showed that the top 10 most popular hedge fund stocks returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th but managed to beat the market again by 3.3 percentage points. Unfortunately ESLT wasn't nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); ESLT investors were disappointed as the stock returned -6.7% since the end of the first quarter (through 6/11) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.

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