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. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Starwood Property Trust, Inc. (NYSE:STWD).
Starwood Property Trust, Inc. (NYSE:STWD) was in 21 hedge funds' portfolios at the end of December. STWD investors should pay attention to an increase in support from the world's most elite money managers in recent months. There were 20 hedge funds in our database with STWD holdings at the end of the previous quarter. Our calculations also showed that STWD 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_256989" align="aligncenter" width="400"] Dmitry Balyasny of Balyasny 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. Keeping this in mind we're going to take a look at the recent hedge fund action encompassing Starwood Property Trust, Inc. (NYSE:STWD).
How have hedgies been trading Starwood Property Trust, Inc. (NYSE:STWD)?
At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards STWD over the last 18 quarters. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
The largest stake in Starwood Property Trust, Inc. (NYSE:STWD) was held by Cardinal Capital, which reported holding $41.4 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $38.2 million position. Other investors bullish on the company included Renaissance Technologies, Waterfront Capital Partners, and Clough Capital Partners. In terms of the portfolio weights assigned to each position Birch Run Capital allocated the biggest weight to Starwood Property Trust, Inc. (NYSE:STWD), around 2.59% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, setting aside 2.24 percent of its 13F equity portfolio to STWD.
With a general bullishness amongst the heavyweights, key money managers have jumped into Starwood Property Trust, Inc. (NYSE:STWD) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the largest position in Starwood Property Trust, Inc. (NYSE:STWD). Balyasny Asset Management had $10.4 million invested in the company at the end of the quarter. Matthew Drapkin and Steven R. Becker's Becker Drapkin Management also made a $0.9 million investment in the stock during the quarter. The following funds were also among the new STWD investors: Mika Toikka's AlphaCrest Capital Management and Mike Vranos's Ellington.
Let's now take a look at hedge fund activity in other stocks similar to Starwood Property Trust, Inc. (NYSE:STWD). These stocks are Anaplan, Inc. (NYSE:PLAN), FLIR Systems, Inc. (NASDAQ:FLIR), Momo Inc (NASDAQ:MOMO), and Owl Rock Capital Corporation (NYSE:ORCC). This group of stocks' market values are similar to STWD's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PLAN,57,2187728,13 FLIR,32,202619,7 MOMO,38,917767,11 ORCC,8,159825,2 Average,33.75,866985,8.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $867 million. That figure was $169 million in STWD's case. Anaplan, Inc. (NYSE:PLAN) is the most popular stock in this table. On the other hand Owl Rock Capital Corporation (NYSE:ORCC) is the least popular one with only 8 bullish hedge fund positions. Starwood Property Trust, Inc. (NYSE:STWD) 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately STWD wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); STWD investors were disappointed as the stock returned -43.6% 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 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.