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Were Hedge Funds Right About Service Properties Trust (SVC)?

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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Service Properties Trust (NASDAQ:SVC)? The smart money sentiment can provide an answer to this question.

Service Properties Trust (NASDAQ:SVC) was in 18 hedge funds' portfolios at the end of March. The all time high for this statistic is 23. SVC investors should pay attention to a decrease in hedge fund sentiment recently. There were 20 hedge funds in our database with SVC holdings at the end of December. Our calculations also showed that SVC isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David E. Shaw of D.E. Shaw
David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let's take a look at the fresh hedge fund action encompassing Service Properties Trust (NASDAQ:SVC).

Do Hedge Funds Think SVC Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in SVC over the last 23 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SVC A Good Stock To Buy?
Is SVC A Good Stock To Buy?

Among these funds, Redwood Capital Management held the most valuable stake in Service Properties Trust (NASDAQ:SVC), which was worth $82.3 million at the end of the fourth quarter. On the second spot was Senator Investment Group which amassed $16.5 million worth of shares. Balyasny Asset Management, Columbus Hill Capital Management, and D E Shaw 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 Redwood Capital Management allocated the biggest weight to Service Properties Trust (NASDAQ:SVC), around 4.01% of its 13F portfolio. Columbus Hill Capital Management is also relatively very bullish on the stock, dishing out 1.28 percent of its 13F equity portfolio to SVC.

Judging by the fact that Service Properties Trust (NASDAQ:SVC) has witnessed a decline in interest from the smart money, logic holds that there lies a certain "tier" of hedgies that slashed their full holdings heading into Q2. Intriguingly, Israel Englander's Millennium Management sold off the largest investment of the 750 funds watched by Insider Monkey, comprising close to $8.1 million in stock. Michael Gelband's fund, ExodusPoint Capital, also dropped its stock, about $0.3 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds heading into Q2.

Let's go over hedge fund activity in other stocks similar to Service Properties Trust (NASDAQ:SVC). We will take a look at Infinera Corp. (NASDAQ:INFN), Apollo Commercial Real Est. Finance Inc (NYSE:ARI), TechTarget Inc (NASDAQ:TTGT), Dicerna Pharmaceuticals Inc (NASDAQ:DRNA), Progress Software Corporation (NASDAQ:PRGS), Pretium Resources Inc (NYSE:PVG), and McGrath RentCorp (NASDAQ:MGRC). This group of stocks' market valuations are closest to SVC's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position INFN,20,372720,-1 ARI,11,44247,-7 TTGT,17,129279,-1 DRNA,27,294797,-2 PRGS,18,154642,2 PVG,22,154632,0 MGRC,13,66010,-7 Average,18.3,173761,-2.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.3 hedge funds with bullish positions and the average amount invested in these stocks was $174 million. That figure was $153 million in SVC's case. Dicerna Pharmaceuticals Inc (NASDAQ:DRNA) is the most popular stock in this table. On the other hand Apollo Commercial Real Est. Finance Inc (NYSE:ARI) is the least popular one with only 11 bullish hedge fund positions. Service Properties Trust (NASDAQ:SVC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SVC is 48.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately SVC wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); SVC investors were disappointed as the stock returned -3.8% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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