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 (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. Keeping this in mind let's see whether Independence Realty Trust Inc (NYSE:IRT) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Independence Realty Trust Inc (NYSE:IRT) has seen a decrease in hedge fund sentiment lately. Our calculations also showed that IRT 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).
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 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 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_758454" align="aligncenter" width="400"] James Dondero of Highland Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader's corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let's analyze the recent hedge fund action surrounding Independence Realty Trust Inc (NYSE:IRT).
How have hedgies been trading Independence Realty Trust Inc (NYSE:IRT)?
Heading into the first quarter of 2020, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from the third quarter of 2019. By comparison, 9 hedge funds held shares or bullish call options in IRT a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Independence Realty Trust Inc (NYSE:IRT), which was worth $89.6 million at the end of the third quarter. On the second spot was Highland Capital Management which amassed $6.4 million worth of shares. Ancora Advisors, PEAK6 Capital Management, and Two Sigma Advisors 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 Highland Capital Management allocated the biggest weight to Independence Realty Trust Inc (NYSE:IRT), around 0.49% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, designating 0.07 percent of its 13F equity portfolio to IRT.
Seeing as Independence Realty Trust Inc (NYSE:IRT) has faced a decline in interest from the aggregate hedge fund industry, it's easy to see that there exists a select few hedgies who were dropping their full holdings by the end of the third quarter. Interestingly, Bruce Kovner's Caxton Associates LP cut the largest stake of all the hedgies watched by Insider Monkey, valued at about $0.5 million in stock, and Benjamin A. Smith's Laurion Capital Management was right behind this move, as the fund cut about $0.3 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 5 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Independence Realty Trust Inc (NYSE:IRT) but similarly valued. We will take a look at Centennial Resource Development, Inc. (NASDAQ:CDEV), Enterprise Financial Services Corp (NASDAQ:EFSC), Blucora Inc (NASDAQ:BCOR), and Tactile Systems Technology, Inc. (NASDAQ:TCMD). All of these stocks' market caps resemble IRT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CDEV,29,188314,1 EFSC,14,58786,1 BCOR,13,134223,-1 TCMD,12,45652,2 Average,17,106744,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $98 million in IRT's case. Centennial Resource Development, Inc. (NASDAQ:CDEV) is the most popular stock in this table. On the other hand Tactile Systems Technology, Inc. (NASDAQ:TCMD) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Independence Realty Trust Inc (NYSE:IRT) is even less popular than TCMD. Hedge funds dodged a bullet by taking a bearish stance towards IRT. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but managed to beat the market by 12.9 percentage points. Unfortunately IRT wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); IRT investors were disappointed as the stock returned -28.5% 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020. 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.