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. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Welltower Inc. (NYSE:WELL).
Welltower Inc. (NYSE:WELL) has experienced an increase in support from the world's most elite money managers recently. Our calculations also showed that WELL 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_26794" align="aligncenter" width="400"] Paul Tudor Jones of Tudor Investment Corp[/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. Keeping this in mind let's view the key hedge fund action regarding Welltower Inc. (NYSE:WELL).
What does smart money think about Welltower Inc. (NYSE:WELL)?
Heading into the first quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 41% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards WELL over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, Zimmer Partners, managed by Stuart J. Zimmer, holds the biggest position in Welltower Inc. (NYSE:WELL). Zimmer Partners has a $403.2 million position in the stock, comprising 5.6% of its 13F portfolio. The second most bullish fund manager is Phill Gross and Robert Atchinson of Adage Capital Management, with a $38.2 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish encompass Cliff Asness's AQR Capital Management, Renaissance Technologies and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Zimmer Partners allocated the biggest weight to Welltower Inc. (NYSE:WELL), around 5.58% of its 13F portfolio. Stevens Capital Management is also relatively very bullish on the stock, dishing out 0.43 percent of its 13F equity portfolio to WELL.
As aggregate interest increased, key hedge funds were leading the bulls' herd. OZ Management, managed by Daniel S. Och, assembled the largest position in Welltower Inc. (NYSE:WELL). OZ Management had $5.1 million invested in the company at the end of the quarter. Matthew Tewksbury's Stevens Capital Management also made a $4.6 million investment in the stock during the quarter. The other funds with brand new WELL positions are Benjamin A. Smith's Laurion Capital Management, Israel Englander's Millennium Management, and Paul Tudor Jones's Tudor Investment Corp.
Let's go over hedge fund activity in other stocks similar to Welltower Inc. (NYSE:WELL). We will take a look at O'Reilly Automotive Inc (NASDAQ:ORLY), Barrick Gold Corporation (NYSE:GOLD), Southern Copper Corporation (NYSE:SCCO), and General Mills, Inc. (NYSE:GIS). This group of stocks' market caps match WELL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ORLY,64,2318640,17 GOLD,51,1814507,3 SCCO,20,230399,4 GIS,37,907163,0 Average,43,1317677,6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 43 hedge funds with bullish positions and the average amount invested in these stocks was $1318 million. That figure was $533 million in WELL's case. O'Reilly Automotive Inc (NASDAQ:ORLY) is the most popular stock in this table. On the other hand Southern Copper Corporation (NYSE:SCCO) is the least popular one with only 20 bullish hedge fund positions. Welltower Inc. (NYSE:WELL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately WELL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WELL investors were disappointed as the stock returned -43% 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 most of these stocks already outperformed the market in Q1. 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.