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 over the past few 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 hedge funds do have great stock picking skills, so let’s take a glance at the smart money sentiment towards National Retail Properties, Inc. (NYSE:NNN).
Hedge fund interest in National Retail Properties, Inc. (NYSE:NNN) 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 NNN to other stocks including PulteGroup, Inc. (NYSE:PHM), Enel Chile S.A. (NYSE:ENIC), and Axalta Coating Systems Ltd (NYSE:AXTA) to get a better sense of its popularity.
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 18 percentage points since May 2014 through December 3, 2018 (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 check out the latest hedge fund action surrounding National Retail Properties, Inc. (NYSE:NNN).
How are hedge funds trading National Retail Properties, Inc. (NYSE:NNN)?
At Q3's end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, no change from the previous quarter. The graph below displays the number of hedge funds with bullish position in NNN over the last 13 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
More specifically, Millennium Management was the largest shareholder of National Retail Properties, Inc. (NYSE:NNN), with a stake worth $51.8 million reported as of the end of September. Trailing Millennium Management was AEW Capital Management, which amassed a stake valued at $48.3 million. Fisher Asset Management, Citadel Investment Group, and BlueCrest Capital Mgmt. were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as National Retail Properties, Inc. (NYSE:NNN) has experienced a decline in interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of fund managers who were dropping their entire stakes heading into Q3. Interestingly, John Overdeck and David Siegel's Two Sigma Advisors dropped the largest position of the 700 funds tracked by Insider Monkey, comprising an estimated $4.1 million in stock. Matthew Tewksbury's fund, Stevens Capital Management, also dropped its stock, about $1.7 million worth. These bearish behaviors are important to note, as aggregate 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 - not necessarily in the same industry as National Retail Properties, Inc. (NYSE:NNN) but similarly valued. These stocks are PulteGroup, Inc. (NYSE:PHM), Enel Chile S.A. (NYSE:ENIC), Axalta Coating Systems Ltd (NYSE:AXTA), and Nice Ltd (NASDAQ:NICE). This group of stocks' market values resemble NNN's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PHM,18,488381,-3 ENIC,4,21985,-2 AXTA,43,2358252,3 NICE,14,199681,1 Average,19.75,767075,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $767 million. That figure was $147 million in NNN's case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand Enel Chile S.A. (NYSE:ENIC) is the least popular one with only 4 bullish hedge fund positions. National Retail Properties, Inc. (NYSE:NNN) 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. In this regard AXTA might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.