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Hedge Funds Are Cashing Out Of Two Harbors Investment Corp (TWO)?

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While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Two Harbors Investment Corp (NYSE:TWO).

Is Two Harbors Investment Corp (NYSE:TWO) a buy, sell, or hold? Money managers were becoming less hopeful. The number of long hedge fund positions retreated by 2 lately. Two Harbors Investment Corp (NYSE:TWO) was in 30 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 32. Our calculations also showed that TWO isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 32 hedge funds in our database with TWO holdings at the end of March.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Glazer of Glazer Capital
Paul Glazer of Glazer Capital

Paul Glazer of Glazer Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind we're going to review the recent hedge fund action encompassing Two Harbors Investment Corp (NYSE:TWO).

Do Hedge Funds Think TWO Is A Good Stock To Buy Now?

At Q2's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in TWO a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Two Sigma Advisors, managed by John Overdeck and David Siegel, holds the most valuable position in Two Harbors Investment Corp (NYSE:TWO). Two Sigma Advisors has a $33.3 million position in the stock, comprising 0.1% of its 13F portfolio. The second most bullish fund manager is OZ Management, managed by Daniel S. Och, which holds a $17.6 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions comprise Ken Griffin's Citadel Investment Group, Israel Englander's Millennium Management and Paul Glazer's Glazer Capital. In terms of the portfolio weights assigned to each position Cadian Capital allocated the biggest weight to Two Harbors Investment Corp (NYSE:TWO), around 0.44% of its 13F portfolio. Fir Tree is also relatively very bullish on the stock, earmarking 0.41 percent of its 13F equity portfolio to TWO.

Due to the fact that Two Harbors Investment Corp (NYSE:TWO) has faced a decline in interest from the smart money, it's easy to see that there is a sect of money managers that elected to cut their entire stakes heading into Q3. Interestingly, Stuart J. Zimmer's Zimmer Partners cut the biggest stake of the 750 funds watched by Insider Monkey, valued at an estimated $13.2 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund dumped about $11.4 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds heading into Q3.

Let's also examine hedge fund activity in other stocks similar to Two Harbors Investment Corp (NYSE:TWO). These stocks are Establishment Labs Holdings Inc. (NASDAQ:ESTA), PennyMac Mortgage Investment Trust (NYSE:PMT), B. Riley Financial, Inc. (NASDAQ:RILY), BancFirst Corporation (NASDAQ:BANF), Workhorse Group, Inc. (NASDAQ:WKHS), Bionano Genomics, Inc. (NASDAQ:BNGO), and Community Health Systems (NYSE:CYH). This group of stocks' market valuations are similar to TWO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ESTA,17,353806,4 PMT,11,10452,3 RILY,24,145562,-1 BANF,7,10680,3 WKHS,13,60261,-3 BNGO,17,40555,7 CYH,25,301172,4 Average,16.3,131784,2.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.3 hedge funds with bullish positions and the average amount invested in these stocks was $132 million. That figure was $161 million in TWO's case. Community Health Systems (NYSE:CYH) is the most popular stock in this table. On the other hand BancFirst Corporation (NASDAQ:BANF) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Two Harbors Investment Corp (NYSE:TWO) is more popular among hedge funds. Our overall hedge fund sentiment score for TWO is 81.1. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. Unfortunately TWO wasn't nearly as popular as these 5 stocks and hedge funds that were betting on TWO were disappointed as the stock returned -9.6% since the end of the second quarter (through 10/15) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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