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Were Hedge Funds Right About Piling Into Lennar Corporation (LEN)?

Abigail Fisher

With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was Lennar Corporation (NYSE:LEN).

Lennar Corporation (NYSE:LEN) has seen a decrease in enthusiasm from smart money of late. LEN was in 53 hedge funds' portfolios at the end of the second quarter of 2019. There were 61 hedge funds in our database with LEN holdings at the end of the previous quarter. Our calculations also showed that LEN isn't among the 30 most popular stocks among hedge funds (see the video below). However, overall hedge fund sentiment towards the stock is still extremely bullish. We will tell you why below. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 market by 40 percentage points since May 2014 through May 30, 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.

LEN_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to analyze the recent hedge fund action encompassing Lennar Corporation (NYSE:LEN).

How have hedgies been trading Lennar Corporation (NYSE:LEN)?

At Q2's end, a total of 53 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. By comparison, 63 hedge funds held shares or bullish call options in LEN a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Glenn Greenberg

More specifically, Greenhaven Associates was the largest shareholder of Lennar Corporation (NYSE:LEN), with a stake worth $451.5 million reported as of the end of March. Trailing Greenhaven Associates was Eminence Capital, which amassed a stake valued at $238.2 million. Brave Warrior Capital, Abrams Bison Investments, and Long Pond Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Lennar Corporation (NYSE:LEN) has witnessed declining sentiment from hedge fund managers, it's easy to see that there exists a select few fund managers that elected to cut their full holdings by the end of the second quarter. Interestingly, Daniel Sundheim's D1 Capital Partners sold off the biggest investment of the "upper crust" of funds tracked by Insider Monkey, comprising an estimated $226.8 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also sold off its stock, about $50.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 8 funds by the end of the second quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Lennar Corporation (NYSE:LEN) but similarly valued. These stocks are Deutsche Bank Aktiengesellschaft (NYSE:DB), HCP, Inc. (NYSE:HCP), MGM Resorts International (NYSE:MGM), and New Oriental Education & Tech Group Inc. (NYSE:EDU). All of these stocks' market caps are similar to LEN's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DB,11,1015885,-2 HCP,26,634618,0 MGM,35,1982659,-10 EDU,32,849989,4 Average,26,1120788,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $1121 million. That figure was $1833 million in LEN's case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand Deutsche Bank Aktiengesellschaft (NYSE:DB) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Lennar Corporation (NYSE:LEN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on LEN as the stock returned 15.3% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Disclosure: None. This article was originally published at Insider Monkey.

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