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Hedge funds don't get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don't realize is that 100% of the passive funds didn't see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let's see whether Resideo Technologies, Inc. (NYSE:REZI) makes for a good investment at the moment.
Is Resideo Technologies, Inc. (NYSE:REZI) a great investment today? Investors who are in the know are getting less bullish. The number of bullish hedge fund positions were trimmed by 11 in recent months. Our calculations also showed that REZI 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). REZI was in 21 hedge funds' portfolios at the end of December. There were 32 hedge funds in our database with REZI holdings at the end of the previous quarter.
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 S&P 500 ETFs by 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.
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Clint Carlson of Carlson Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the "next Amazon" in this video; again we are listening. 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. Keeping this in mind let's take a look at the new hedge fund action surrounding Resideo Technologies, Inc. (NYSE:REZI).
Hedge fund activity in Resideo Technologies, Inc. (NYSE:REZI)
Heading into the first quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -34% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards REZI over the last 18 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Praesidium Investment Management Company was the largest shareholder of Resideo Technologies, Inc. (NYSE:REZI), with a stake worth $92.8 million reported as of the end of September. Trailing Praesidium Investment Management Company was Freshford Capital Management, which amassed a stake valued at $65.1 million. Carlson Capital, GAMCO Investors, 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 Freshford Capital Management allocated the biggest weight to Resideo Technologies, Inc. (NYSE:REZI), around 11.49% of its 13F portfolio. Praesidium Investment Management Company is also relatively very bullish on the stock, setting aside 5.74 percent of its 13F equity portfolio to REZI.
Due to the fact that Resideo Technologies, Inc. (NYSE:REZI) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there were a few money managers that elected to cut their entire stakes in the third quarter. Interestingly, David Rosen's Rubric Capital Management cut the biggest investment of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $25.8 million in stock. Isaac Corre's fund, Governors Lane, also dumped its stock, about $11.5 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 11 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Resideo Technologies, Inc. (NYSE:REZI). These stocks are U.S. Physical Therapy, Inc. (NYSE:USPH), La-Z-Boy Incorporated (NYSE:LZB), MicroStrategy Incorporated (NASDAQ:MSTR), and Industrial Logistics Properties Trust (NASDAQ:ILPT). This group of stocks' market caps resemble REZI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position USPH,16,71923,3 LZB,21,87375,-4 MSTR,25,108172,3 ILPT,13,83062,1 Average,18.75,87633,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $88 million. That figure was $256 million in REZI's case. MicroStrategy Incorporated (NASDAQ:MSTR) is the most popular stock in this table. On the other hand Industrial Logistics Properties Trust (NASDAQ:ILPT) is the least popular one with only 13 bullish hedge fund positions. Resideo Technologies, Inc. (NYSE:REZI) 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 10 most popular stocks among hedge funds 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 beat the market by 12.9 percentage points. Unfortunately REZI wasn't nearly as popular as these 10 stocks and hedge funds that were betting on REZI were disappointed as the stock returned -59.6% 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 many of these stocks already outperformed the market so far this year.
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.