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 (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Invitation Homes Inc. (NYSE:INVH) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Invitation Homes Inc. (NYSE:INVH) a bargain? Money managers are turning bullish. The number of bullish hedge fund positions rose by 3 in recent months. Our calculations also showed that INVH isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). INVH was in 33 hedge funds' portfolios at the end of December. There were 30 hedge funds in our database with INVH holdings at the end of the previous quarter.
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.
[caption id="attachment_26073" align="aligncenter" width="400"] Jim Simons of Renaissance Technologies[/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 we're going to take a glance at the recent hedge fund action regarding Invitation Homes Inc. (NYSE:INVH).
How are hedge funds trading Invitation Homes Inc. (NYSE:INVH)?
At the end of the fourth quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in INVH over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Zimmer Partners was the largest shareholder of Invitation Homes Inc. (NYSE:INVH), with a stake worth $419.6 million reported as of the end of September. Trailing Zimmer Partners was Renaissance Technologies, which amassed a stake valued at $236.4 million. D E Shaw, Millennium Management, and GLG Partners 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 Zimmer Partners allocated the biggest weight to Invitation Homes Inc. (NYSE:INVH), around 5.8% of its 13F portfolio. Hill Winds Capital is also relatively very bullish on the stock, earmarking 4.71 percent of its 13F equity portfolio to INVH.
As aggregate interest increased, key hedge funds have been driving this bullishness. Castle Hook Partners, managed by Josh Donfeld and David Rogers, created the largest position in Invitation Homes Inc. (NYSE:INVH). Castle Hook Partners had $15 million invested in the company at the end of the quarter. Greg Poole's Echo Street Capital Management also initiated a $14.9 million position during the quarter. The other funds with new positions in the stock are Simon Sadler's Segantii Capital, Charles Davidson and Joseph Jacobs's Wexford Capital, and Matthew Crandall Gilman's Hill Winds Capital.
Let's go over hedge fund activity in other stocks similar to Invitation Homes Inc. (NYSE:INVH). We will take a look at TransUnion (NYSE:TRU), KB Financial Group, Inc. (NYSE:KB), Deutsche Bank AG (NYSE:DB), and Tiffany & Co. (NYSE:TIF). All of these stocks' market caps are closest to INVH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRU,37,931964,-1 KB,5,47584,-3 DB,12,1010511,0 TIF,62,2223708,30 Average,29,1053442,6.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $1053 million. That figure was $1112 million in INVH's case. Tiffany & Co. (NYSE:TIF) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 5 bullish hedge fund positions. Invitation Homes Inc. (NYSE:INVH) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 beat the market by 3.2 percentage points. Unfortunately INVH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on INVH were disappointed as the stock returned -30.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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.