Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is Walker & Dunlop Inc. (NYSE:WD) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.
Is Walker & Dunlop Inc. (NYSE:WD) the right pick for your portfolio? The smart money is getting more optimistic. The number of bullish hedge fund positions rose by 9 recently. Our calculations also showed that WD 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).
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 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.
[caption id="attachment_88925" align="aligncenter" width="400"] Bill Miller of Miller Value Partners[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let's take a gander at the fresh hedge fund action encompassing Walker & Dunlop Inc. (NYSE:WD).
What have hedge funds been doing with Walker & Dunlop Inc. (NYSE:WD)?
At Q4's end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 56% from the previous quarter. On the other hand, there were a total of 11 hedge funds with a bullish position in WD a year ago. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
The largest stake in Walker & Dunlop Inc. (NYSE:WD) was held by Royce & Associates, which reported holding $18.1 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $15.6 million position. Other investors bullish on the company included Sabrepoint Capital, GLG Partners, and Miller Value Partners. In terms of the portfolio weights assigned to each position Sabrepoint Capital allocated the biggest weight to Walker & Dunlop Inc. (NYSE:WD), around 5.15% of its 13F portfolio. Lyon Street Capital is also relatively very bullish on the stock, dishing out 1.76 percent of its 13F equity portfolio to WD.
As aggregate interest increased, key hedge funds have jumped into Walker & Dunlop Inc. (NYSE:WD) headfirst. Two Sigma Advisors, managed by John Overdeck and David Siegel, created the most outsized position in Walker & Dunlop Inc. (NYSE:WD). Two Sigma Advisors had $1.2 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe's Voleon Capital also initiated a $1.2 million position during the quarter. The following funds were also among the new WD investors: Brian C. Freckmann's Lyon Street Capital, Peter Muller's PDT Partners, and Michael Gelband's ExodusPoint Capital.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Walker & Dunlop Inc. (NYSE:WD) but similarly valued. These stocks are Bank of N.T. Butterfield & Son Limited (The) (NYSE:NTB), Cardtronics plc (NASDAQ:CATM), Adient plc (NYSE:ADNT), and Cubic Corporation (NYSE:CUB). This group of stocks' market valuations are similar to WD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NTB,17,149206,2 CATM,22,554249,1 ADNT,36,521141,9 CUB,19,43685,2 Average,23.5,317070,3.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $317 million. That figure was $102 million in WD's case. Adient plc (NYSE:ADNT) is the most popular stock in this table. On the other hand Bank of N.T. Butterfield & Son Limited (The) (NYSE:NTB) is the least popular one with only 17 bullish hedge fund positions. Walker & Dunlop Inc. (NYSE:WD) 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 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately WD wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WD were disappointed as the stock returned -56.6% 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.