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Did Hedge Funds Make The Right Call On Starwood Property Trust, Inc. (STWD) ?

Abigail Fisher
·6 mins read

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 Starwood Property Trust, Inc. (NYSE:STWD) and determine whether hedge funds had an edge regarding this stock.

Is Starwood Property Trust, Inc. (NYSE:STWD) a buy here? Prominent investors were taking an optimistic view. The number of bullish hedge fund positions advanced by 2 lately. Our calculations also showed that STWD 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.

[caption id="attachment_844243" align="aligncenter" width="399"] Donald Sussman of Paloma Partners[/caption]

Donald Sussman Paloma Partners
Donald Sussman Paloma Partners

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 review the recent hedge fund action surrounding Starwood Property Trust, Inc. (NYSE:STWD).

What have hedge funds been doing with Starwood Property Trust, Inc. (NYSE:STWD)?

Heading into the second quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in STWD 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, Cardinal Capital was the largest shareholder of Starwood Property Trust, Inc. (NYSE:STWD), with a stake worth $27.9 million reported as of the end of September. Trailing Cardinal Capital was Waterfront Capital Partners, which amassed a stake valued at $13.9 million. Two Sigma Advisors, Citadel Investment Group, and Millennium 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 Birch Run Capital allocated the biggest weight to Starwood Property Trust, Inc. (NYSE:STWD), around 2.75% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, earmarking 1.71 percent of its 13F equity portfolio to STWD.

As aggregate interest increased, key hedge funds were breaking ground themselves. Forward Management, managed by J. Alan Reid, Jr., initiated the most valuable position in Starwood Property Trust, Inc. (NYSE:STWD). Forward Management had $2.7 million invested in the company at the end of the quarter. Gregg Moskowitz's Interval Partners also initiated a $0.8 million position during the quarter. The following funds were also among the new STWD investors: Paul Marshall and Ian Wace's Marshall Wace LLP, Donald Sussman's Paloma Partners, and Paul Tudor Jones's Tudor Investment Corp.

Let's check out hedge fund activity in other stocks similar to Starwood Property Trust, Inc. (NYSE:STWD). We will take a look at Performance Food Group Company (NYSE:PFGC), Harley-Davidson, Inc. (NYSE:HOG), Carter's, Inc. (NYSE:CRI), and The Descartes Systems Group Inc (NASDAQ:DSGX). This group of stocks' market caps are similar to STWD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PFGC,29,189889,-2 HOG,17,88189,-2 CRI,23,149581,2 DSGX,10,103626,-2 Average,19.75,132821,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $133 million. That figure was $97 million in STWD's case. Performance Food Group Company (NYSE:PFGC) is the most popular stock in this table. On the other hand The Descartes Systems Group Inc (NASDAQ:DSGX) is the least popular one with only 10 bullish hedge fund positions. Starwood Property Trust, Inc. (NYSE:STWD) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on STWD as the stock returned 50.7% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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