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Did Hedge Funds Make The Right Call On Two Harbors Investment Corp (TWO) ?

Debasis Saha

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 Two Harbors Investment Corp (NYSE:TWO) and determine whether hedge funds had an edge regarding this stock.

Is Two Harbors Investment Corp (NYSE:TWO) ready to rally soon? Prominent investors were becoming more confident. The number of long hedge fund bets went up by 4 in recent months. Our calculations also showed that TWO 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.

In the eyes of most market participants, hedge funds are seen as unimportant, old financial vehicles of the past. While there are over 8000 funds trading at the moment, Our experts hone in on the leaders of this group, approximately 850 funds. These investment experts handle the lion's share of all hedge funds' total asset base, and by monitoring their best picks, Insider Monkey has deciphered many investment strategies that have historically beaten the S&P 500 index. Insider Monkey's flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

[caption id="attachment_845793" align="aligncenter" width="400"] Peter Rathjens of Arrowstreet Capital[/caption]

Peter Rathjens Arrowstreet Capital 394
Peter Rathjens Arrowstreet Capital 394

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 analyze the recent hedge fund action encompassing Two Harbors Investment Corp (NYSE:TWO).

How are hedge funds trading Two Harbors Investment Corp (NYSE:TWO)?

At Q1's end, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in TWO a year ago. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Is TWO A Good Stock To Buy?
Is TWO A Good Stock To Buy?

More specifically, Lakewood Capital Management was the largest shareholder of Two Harbors Investment Corp (NYSE:TWO), with a stake worth $9.5 million reported as of the end of September. Trailing Lakewood Capital Management was Citadel Investment Group, which amassed a stake valued at $5.7 million. Winton Capital Management, Balyasny Asset Management, 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 Neo Ivy Capital allocated the biggest weight to Two Harbors Investment Corp (NYSE:TWO), around 0.5% of its 13F portfolio. Lakewood Capital Management is also relatively very bullish on the stock, dishing out 0.44 percent of its 13F equity portfolio to TWO.

As aggregate interest increased, specific money managers have been driving this bullishness. Lakewood Capital Management, managed by Anthony Bozza, initiated the most valuable position in Two Harbors Investment Corp (NYSE:TWO). Lakewood Capital Management had $9.5 million invested in the company at the end of the quarter. Bill Miller's Miller Value Partners also initiated a $1.7 million position during the quarter. The other funds with brand new TWO positions are Israel Englander's Millennium Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Kenneth Tropin's Graham Capital Management.

Let's also examine hedge fund activity in other stocks similar to Two Harbors Investment Corp (NYSE:TWO). These stocks are Cedar Fair, L.P. (NYSE:FUN), Chart Industries, Inc. (NASDAQ:GTLS), Huron Consulting Group (NASDAQ:HURN), and Y-mAbs Therapeutics, Inc. (NASDAQ:YMAB). All of these stocks' market caps are similar to TWO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FUN,10,29631,1 GTLS,21,120048,2 HURN,17,57403,3 YMAB,11,98663,-1 Average,14.75,76436,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $32 million in TWO's case. Chart Industries, Inc. (NASDAQ:GTLS) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Two Harbors Investment Corp (NYSE:TWO) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on TWO as the stock returned 37.6% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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