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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Capstead Mortgage Corporation (NYSE:CMO) to find out whether there were any major changes in hedge funds' views.
Is CMO a good stock to buy now? Money managers were taking an optimistic view. The number of long hedge fund positions rose by 2 in recent months. Capstead Mortgage Corporation (NYSE:CMO) was in 15 hedge funds' portfolios at the end of September. The all time high for this statistic is 15. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that CMO isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Matthew Hulsizer of PEAK6 Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. Keeping this in mind let's take a gander at the key hedge fund action encompassing Capstead Mortgage Corporation (NYSE:CMO).
Do Hedge Funds Think CMO Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from the second quarter of 2020. By comparison, 11 hedge funds held shares or bullish call options in CMO a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Paradice Investment Management was the largest shareholder of Capstead Mortgage Corporation (NYSE:CMO), with a stake worth $34.4 million reported as of the end of September. Trailing Paradice Investment Management was Renaissance Technologies, which amassed a stake valued at $9 million. Citadel Investment Group, Diametric Capital, and Prelude Capital (previously Springbok Capital) 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 Diametric Capital allocated the biggest weight to Capstead Mortgage Corporation (NYSE:CMO), around 2.62% of its 13F portfolio. Paradice Investment Management is also relatively very bullish on the stock, dishing out 2.49 percent of its 13F equity portfolio to CMO.
As one would reasonably expect, specific money managers have been driving this bullishness. Diametric Capital, managed by Nick Thakore, assembled the largest position in Capstead Mortgage Corporation (NYSE:CMO). Diametric Capital had $3.5 million invested in the company at the end of the quarter. Gavin Saitowitz and Cisco J. del Valle's Prelude Capital (previously Springbok Capital) also made a $2.3 million investment in the stock during the quarter. The only other fund with a brand new CMO position is Matthew Hulsizer's PEAK6 Capital Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Capstead Mortgage Corporation (NYSE:CMO) but similarly valued. These stocks are Geron Corporation (NASDAQ:GERN), Assembly Biosciences Inc (NASDAQ:ASMB), TrueCar Inc (NASDAQ:TRUE), Apollo Investment Corp. (NASDAQ:AINV), ZIOPHARM Oncology Inc. (NASDAQ:ZIOP), Ellington Financial Inc. (NYSE:EFC), and SIGA Technologies Inc. (NASDAQ:SIGA). This group of stocks' market valuations resemble CMO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GERN,16,133881,5 ASMB,22,195597,3 TRUE,18,103244,1 AINV,5,21619,-4 ZIOP,13,102366,2 EFC,11,37613,3 SIGA,16,52498,5 Average,14.4,92403,2.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.4 hedge funds with bullish positions and the average amount invested in these stocks was $92 million. That figure was $61 million in CMO's case. Assembly Biosciences Inc (NASDAQ:ASMB) is the most popular stock in this table. On the other hand Apollo Investment Corp. (NASDAQ:AINV) is the least popular one with only 5 bullish hedge fund positions. Capstead Mortgage Corporation (NYSE:CMO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CMO is 66.4. 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. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately CMO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CMO were disappointed as the stock returned 6.2% since the end of September (through 12/14) 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.
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Disclosure: None. This article was originally published at Insider Monkey.