We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Invitation Homes Inc. (NYSE:INVH).
Is Invitation Homes Inc. (NYSE:INVH) undervalued? Prominent investors are in a bearish mood. The number of long hedge fund positions were cut by 3 recently. Our calculations also showed that INVH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). INVH was in 28 hedge funds' portfolios at the end of the third quarter of 2019. There were 31 hedge funds in our database with INVH positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a gander at the recent hedge fund action surrounding Invitation Homes Inc. (NYSE:INVH).
What have hedge funds been doing with Invitation Homes Inc. (NYSE:INVH)?
At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in INVH a year ago. With hedgies' capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
More specifically, Zimmer Partners was the largest shareholder of Invitation Homes Inc. (NYSE:INVH), with a stake worth $399.4 million reported as of the end of September. Trailing Zimmer Partners was Renaissance Technologies, which amassed a stake valued at $169.6 million. Senator Investment Group, D E Shaw, and Millennium Management 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 Land & Buildings Investment Management allocated the biggest weight to Invitation Homes Inc. (NYSE:INVH), around 5.97% of its portfolio. Southport Management is also relatively very bullish on the stock, dishing out 5 percent of its 13F equity portfolio to INVH.
Because Invitation Homes Inc. (NYSE:INVH) has faced falling interest from the smart money, it's easy to see that there were a few hedgies who were dropping their entire stakes in the third quarter. At the top of the heap, Jeffrey Furber's AEW Capital Management cut the largest stake of the 750 funds tracked by Insider Monkey, worth close to $94 million in stock. Greg Poole's fund, Echo Street Capital Management, also cut its stock, about $10.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds in the third quarter.
Let's go over hedge fund activity in other stocks similar to Invitation Homes Inc. (NYSE:INVH). These stocks are Citizens Financial Group Inc (NYSE:CFG), WPP plc (NYSE:WPP), Regions Financial Corporation (NYSE:RF), and Amcor plc (NYSE:AMCR). All of these stocks' market caps are similar to INVH's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CFG,38,1571462,-1 WPP,3,41384,0 RF,23,502597,-9 AMCR,16,131192,4 Average,20,561659,-1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $562 million. That figure was $1097 million in INVH's case. Citizens Financial Group Inc (NYSE:CFG) is the most popular stock in this table. On the other hand WPP plc (NYSE:WPP) is the least popular one with only 3 bullish hedge fund positions. Invitation Homes Inc. (NYSE:INVH) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately INVH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on INVH were disappointed as the stock returned 3.6% during the fourth quarter (through the end of November) 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.
Disclosure: None. This article was originally published at Insider Monkey.