Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost more than 25%. Facebook, which was the second most popular stock, lost 20% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the first 2.5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
NVR, Inc. (NYSE:NVR) was in 31 hedge funds' portfolios at the end of the fourth quarter of 2018. NVR has experienced an increase in hedge fund sentiment lately. There were 25 hedge funds in our database with NVR positions at the end of the previous quarter. Our calculations also showed that NVR isn't among the 30 most popular stocks among hedge funds.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.
We're going to take a look at the key hedge fund action encompassing NVR, Inc. (NYSE:NVR).
What have hedge funds been doing with NVR, Inc. (NYSE:NVR)?
At Q4's end, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NVR over the last 14 quarters. With hedgies' sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in NVR, Inc. (NYSE:NVR) was held by Diamond Hill Capital, which reported holding $264.1 million worth of stock at the end of September. It was followed by Impala Asset Management with a $121.9 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and Two Sigma Advisors.
As one would reasonably expect, specific money managers were breaking ground themselves. Lomas Capital Management, managed by Daniel Lascano, established the largest position in NVR, Inc. (NYSE:NVR). Lomas Capital Management had $12.7 million invested in the company at the end of the quarter. Glenn Russell Dubin's Highbridge Capital Management also initiated a $9.9 million position during the quarter. The other funds with brand new NVR positions are Steve Cohen's Point72 Asset Management, Steven Tananbaum's GoldenTree Asset Management, and Bruce Kovner's Caxton Associates LP.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as NVR, Inc. (NYSE:NVR) but similarly valued. We will take a look at Reinsurance Group of America Inc (NYSE:RGA), Shaw Communications Inc (NYSE:SJR), AXA Equitable Holdings, Inc. (NYSE:EQH), and Sun Communities Inc (NYSE:SUI). This group of stocks' market valuations are closest to NVR's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RGA,27,566098,6 SJR,14,204319,-2 EQH,26,676154,5 SUI,22,491736,-1 Average,22.25,484577,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $485 million. That figure was $831 million in NVR's case. Reinsurance Group of America Inc (NYSE:RGA) is the most popular stock in this table. On the other hand Shaw Communications Inc (NYSE:SJR) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks NVR, Inc. (NYSE:NVR) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately NVR wasn't in this group. Hedge funds that bet on NVR were disappointed as the stock returned 11.7% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.