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 American Homes 4 Rent (NYSE:AMH) and determine whether hedge funds had an edge regarding this stock.
American Homes 4 Rent (NYSE:AMH) investors should be aware of a decrease in support from the world's most elite money managers lately. AMH was in 21 hedge funds' portfolios at the end of the first quarter of 2020. There were 23 hedge funds in our database with AMH holdings at the end of the previous quarter. Our calculations also showed that AMH 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.
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 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.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's analyze the new hedge fund action encompassing American Homes 4 Rent (NYSE:AMH).
What have hedge funds been doing with American Homes 4 Rent (NYSE:AMH)?
At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the fourth quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in AMH 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.
Among these funds, Echo Street Capital Management held the most valuable stake in American Homes 4 Rent (NYSE:AMH), which was worth $39 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $35.3 million worth of shares. V3 Capital, Two Sigma Advisors, and Land & Buildings Investment Management 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 Land & Buildings Investment Management allocated the biggest weight to American Homes 4 Rent (NYSE:AMH), around 6.81% of its 13F portfolio. V3 Capital is also relatively very bullish on the stock, setting aside 5.21 percent of its 13F equity portfolio to AMH.
Since American Homes 4 Rent (NYSE:AMH) has witnessed bearish sentiment from hedge fund managers, we can see that there lies a certain "tier" of money managers that slashed their positions entirely in the first quarter. Intriguingly, Noam Gottesman's GLG Partners sold off the largest investment of the "upper crust" of funds monitored by Insider Monkey, valued at about $29.2 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also sold off its stock, about $6 million worth. These moves are important to note, as total hedge fund interest was cut by 2 funds in the first quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as American Homes 4 Rent (NYSE:AMH) but similarly valued. These stocks are SEI Investments Company (NASDAQ:SEIC), The Toro Company (NYSE:TTC), Chemed Corporation (NYSE:CHE), and Vornado Realty Trust (NYSE:VNO). All of these stocks' market caps are similar to AMH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SEIC,33,254738,4 TTC,24,675646,1 CHE,25,381017,3 VNO,25,224296,-6 Average,26.75,383924,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $384 million. That figure was $178 million in AMH's case. SEI Investments Company (NASDAQ:SEIC) is the most popular stock in this table. On the other hand The Toro Company (NYSE:TTC) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks American Homes 4 Rent (NYSE:AMH) is even less popular than TTC. Hedge funds dodged a bullet by taking a bearish stance towards AMH. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but managed to beat the market by 17.1 percentage points. Unfortunately AMH wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); AMH investors were disappointed as the stock returned 19.3% since Q1 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 so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.