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 MFA Financial, Inc. (NYSE:MFA).
Hedge fund interest in MFA Financial, Inc. (NYSE:MFA) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare MFA to other stocks including Rexnord Corp (NYSE:RXN), Viavi Solutions Inc (NASDAQ:VIAV), and Plains GP Holdings LP (NYSE:PAGP) to get a better sense of its popularity.
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 was 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_30600" align="aligncenter" width="400"] Bruce Kovner of Caxton Associates LP[/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 we're going to analyze the recent hedge fund action encompassing MFA Financial, Inc. (NYSE:MFA).
How have hedgies been trading MFA Financial, Inc. (NYSE:MFA)?
Heading into the first quarter of 2020, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in MFA over the last 18 quarters. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in MFA Financial, Inc. (NYSE:MFA), which was worth $19.1 million at the end of the third quarter. On the second spot was Millennium Management which amassed $17.6 million worth of shares. Two Sigma Advisors, Winton Capital Management, and D E Shaw 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 Zebra Capital Management allocated the biggest weight to MFA Financial, Inc. (NYSE:MFA), around 0.34% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, setting aside 0.16 percent of its 13F equity portfolio to MFA.
Because MFA Financial, Inc. (NYSE:MFA) has experienced a decline in interest from hedge fund managers, we can see that there exists a select few hedge funds that elected to cut their full holdings last quarter. At the top of the heap, Kenneth Tropin's Graham Capital Management dumped the largest stake of the 750 funds watched by Insider Monkey, totaling an estimated $6.2 million in stock, and Carl Goldsmith and Scott Klein's Beach Point Capital Management was right behind this move, as the fund dumped about $3.8 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now take a look at hedge fund activity in other stocks similar to MFA Financial, Inc. (NYSE:MFA). These stocks are Rexnord Corp (NYSE:RXN), Viavi Solutions Inc (NASDAQ:VIAV), Plains GP Holdings LP (NYSE:PAGP), and Insperity Inc (NYSE:NSP). This group of stocks' market caps resemble MFA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RXN,25,334197,3 VIAV,37,420718,2 PAGP,26,366780,6 NSP,21,348461,-7 Average,27.25,367539,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $368 million. That figure was $85 million in MFA's case. Viavi Solutions Inc (NASDAQ:VIAV) is the most popular stock in this table. On the other hand Insperity Inc (NYSE:NSP) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks MFA Financial, Inc. (NYSE:MFA) is even less popular than NSP. Hedge funds dodged a bullet by taking a bearish stance towards MFA. Our calculations showed that the top 20 most popular hedge fund stocks 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 managed to beat the market by 5.5 percentage points. Unfortunately MFA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); MFA investors were disappointed as the stock returned -85.1% 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 so far 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.