Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Is Spirit MTA REIT (NYSE:SMTA) a good stock to buy now? The smart money is taking a pessimistic view. The number of long hedge fund positions were trimmed by 2 in recent months. Our calculations also showed that SMTA isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We're going to view the recent hedge fund action regarding Spirit MTA REIT (NYSE:SMTA).
How are hedge funds trading Spirit MTA REIT (NYSE:SMTA)?
Heading into the third quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in SMTA a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Mangrove Partners, managed by Nathaniel August, holds the biggest position in Spirit MTA REIT (NYSE:SMTA). Mangrove Partners has a $34.1 million position in the stock, comprising 3.9% of its 13F portfolio. The second largest stake is held by Indaba Capital Management, managed by Derek C. Schrier, which holds a $28.9 million position; 5.6% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that are bullish comprise David Rosen's Rubric Capital Management, Tom Wagner and Ara Cohen's Knighthead Capital and David Brown's Hawk Ridge Management.
Judging by the fact that Spirit MTA REIT (NYSE:SMTA) has experienced declining sentiment from the smart money, it's safe to say that there lies a certain "tier" of hedge funds that elected to cut their entire stakes in the second quarter. Intriguingly, Peter Algert and Kevin Coldiron's Algert Coldiron Investors dumped the largest stake of the "upper crust" of funds tracked by Insider Monkey, totaling an estimated $0.4 million in stock, and Jeffrey Talpins's Element Capital Management was right behind this move, as the fund dropped about $0.3 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 2 funds in the second quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Spirit MTA REIT (NYSE:SMTA) but similarly valued. We will take a look at Genco Shipping & Trading Limited (NYSE:GNK), Marker Therapeutics, Inc. (NASDAQ:MRKR), Red River Bancshares, Inc. (NASDAQ:RRBI), and Care.com Inc (NYSE:CRCM). This group of stocks' market caps match SMTA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GNK,12,194251,0 MRKR,9,34779,-1 RRBI,3,3948,3 CRCM,21,113594,3 Average,11.25,86643,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $87 million. That figure was $113 million in SMTA's case. Care.com Inc (NYSE:CRCM) is the most popular stock in this table. On the other hand Red River Bancshares, Inc. (NASDAQ:RRBI) is the least popular one with only 3 bullish hedge fund positions. Spirit MTA REIT (NYSE:SMTA) 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately SMTA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SMTA were disappointed as the stock returned 1.2% during the third 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 20 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.
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