We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in American Homes 4 Rent (NYSE:AMH)? The smart money sentiment can provide an answer to this question.
American Homes 4 Rent (NYSE:AMH) investors should be aware of a decrease in activity from the world's largest hedge funds in recent months. Our calculations also showed that AMH isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
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Steven Cohen of Point72 Asset Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now let's take a gander at the recent hedge fund action surrounding American Homes 4 Rent (NYSE:AMH).
How have hedgies been trading American Homes 4 Rent (NYSE:AMH)?
At the end of the fourth quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the previous quarter. By comparison, 18 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.
When looking at the institutional investors followed by Insider Monkey, Greg Poole's Echo Street Capital Management has the largest position in American Homes 4 Rent (NYSE:AMH), worth close to $76 million, comprising 1.2% of its total 13F portfolio. Coming in second is Renaissance Technologies, founded by Jim Simons, holding a $47.9 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other professional money managers with similar optimism contain Jonathan Litt's Land & Buildings Investment Management, Israel Englander's Millennium Management and Ken Griffin's Citadel Investment Group. 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 7.99% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, designating 1.17 percent of its 13F equity portfolio to AMH.
Seeing as American Homes 4 Rent (NYSE:AMH) has experienced declining sentiment from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of money managers that decided to sell off their positions entirely by the end of the third quarter. At the top of the heap, Stuart J. Zimmer's Zimmer Partners sold off the largest position of the "upper crust" of funds monitored by Insider Monkey, worth close to $133.2 million in stock. Matthew Crandall Gilman's fund, Hill Winds Capital, also dropped its stock, about $4 million worth. These moves are important to note, as total hedge fund interest dropped by 4 funds by the end of the third 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 Logitech International SA (NASDAQ:LOGI), Bruker Corporation (NASDAQ:BRKR), GDS Holdings Limited (NASDAQ:GDS), and A. O. Smith Corporation (NYSE:AOS). This group of stocks' market values match AMH's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LOGI,13,255513,-3 BRKR,25,262302,3 GDS,34,1466278,2 AOS,26,396644,3 Average,24.5,595184,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $595 million. That figure was $321 million in AMH's case. GDS Holdings Limited (NASDAQ:GDS) is the most popular stock in this table. On the other hand Logitech International SA (NASDAQ:LOGI) is the least popular one with only 13 bullish hedge fund positions. American Homes 4 Rent (NYSE:AMH) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on AMH as the stock returned -9% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.