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Did Hedge Funds Make The Right Call On Welltower Inc. (WELL) ?

Debasis Saha

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Welltower Inc. (NYSE:WELL) and determine whether the smart money was really smart about this stock.

Is Welltower Inc. (NYSE:WELL) a buy right now? The best stock pickers were buying. The number of long hedge fund positions increased by 1 recently. Our calculations also showed that WELL 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.

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 S&P 500 ETFs by more than 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_278362" align="aligncenter" width="400"] Daniel Och, Founder of OZ Management[/caption]

Och-Ziff Capital Management
Och-Ziff Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like "the Starbucks of cannabis" to identify the next tenbagger. 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. 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. Keeping this in mind let's view the recent hedge fund action surrounding Welltower Inc. (NYSE:WELL).

What does smart money think about Welltower Inc. (NYSE:WELL)?

At Q1's end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in WELL a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Is WELL A Good Stock To Buy?
Is WELL A Good Stock To Buy?

The largest stake in Welltower Inc. (NYSE:WELL) was held by Zimmer Partners, which reported holding $137.3 million worth of stock at the end of September. It was followed by Healthcor Management LP with a $72.4 million position. Other investors bullish on the company included D E Shaw, Zimmer Partners, and Adage Capital Management. In terms of the portfolio weights assigned to each position Healthcor Management LP allocated the biggest weight to Welltower Inc. (NYSE:WELL), around 3.1% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, setting aside 3.04 percent of its 13F equity portfolio to WELL.

As one would reasonably expect, key hedge funds have jumped into Welltower Inc. (NYSE:WELL) headfirst. Healthcor Management LP, managed by Arthur B Cohen and Joseph Healey, initiated the most valuable position in Welltower Inc. (NYSE:WELL). Healthcor Management LP had $72.4 million invested in the company at the end of the quarter. Michael Platt and William Reeves's BlueCrest Capital Mgmt. also made a $3.2 million investment in the stock during the quarter. The other funds with brand new WELL positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Minhua Zhang's Weld Capital Management, and Matthew Hulsizer's PEAK6 Capital Management.

Let's also examine hedge fund activity in other stocks similar to Welltower Inc. (NYSE:WELL). These stocks are TD Ameritrade Holding Corp. (NYSE:AMTD), Entergy Corporation (NYSE:ETR), McCormick & Company, Incorporated (NYSE:MKC), and Schlumberger Limited. (NYSE:SLB). This group of stocks' market valuations match WELL's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMTD,46,1250217,-4 ETR,34,1036847,3 MKC,31,280968,7 SLB,49,641144,2 Average,40,802294,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $802 million. That figure was $313 million in WELL's case. Schlumberger Limited. (NYSE:SLB) is the most popular stock in this table. On the other hand McCormick & Company, Incorporated (NYSE:MKC) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Welltower Inc. (NYSE:WELL) is even less popular than MKC. Hedge funds dodged a bullet by taking a bearish stance towards WELL. 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 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately WELL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); WELL investors were disappointed as the stock returned 14.8% during the second 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 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.

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