At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards New Residential Investment Corp (NYSE:NRZ) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is New Residential Investment Corp (NYSE:NRZ) a first-rate investment today? Investors who are in the know were in a bearish mood. The number of long hedge fund bets fell by 1 recently. New Residential Investment Corp (NYSE:NRZ) was in 22 hedge funds' portfolios at the end of June. The all time high for this statistics is 33. Our calculations also showed that NRZ isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
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 56 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.
Louis Bacon Moore of Moore Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind we're going to view the new hedge fund action regarding New Residential Investment Corp (NYSE:NRZ).
What have hedge funds been doing with New Residential Investment Corp (NYSE:NRZ)?
At Q2's end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in NRZ over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Arrowstreet Capital held the most valuable stake in New Residential Investment Corp (NYSE:NRZ), which was worth $39.9 million at the end of the third quarter. On the second spot was Rubric Capital Management which amassed $25.3 million worth of shares. Moore Global Investments, Point72 Asset Management, and Millennium Management 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 Rubric Capital Management allocated the biggest weight to New Residential Investment Corp (NYSE:NRZ), around 2.92% of its 13F portfolio. Moore Global Investments is also relatively very bullish on the stock, dishing out 0.67 percent of its 13F equity portfolio to NRZ.
Judging by the fact that New Residential Investment Corp (NYSE:NRZ) has witnessed declining sentiment from the smart money, logic holds that there lies a certain "tier" of fund managers that slashed their full holdings last quarter. It's worth mentioning that Josh Donfeld and David Rogers's Castle Hook Partners dumped the largest stake of all the hedgies tracked by Insider Monkey, worth close to $3.5 million in stock. David Harding's fund, Winton Capital Management, also dumped its stock, about $3.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds last quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as New Residential Investment Corp (NYSE:NRZ) but similarly valued. These stocks are Companhia Paranaense de Energia - COPEL (NYSE:ELP), Vivint Smart Home, Inc. (NYSE:VVNT), Alkermes Plc (NASDAQ:ALKS), Gildan Activewear Inc (NYSE:GIL), Aaron's, Inc. (NYSE:AAN), Balchem Corporation (NASDAQ:BCPC), and TechnipFMC plc (NYSE:FTI). This group of stocks' market valuations match NRZ's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ELP,12,39175,5 VVNT,5,5836,-4 ALKS,26,702713,-4 GIL,22,432391,0 AAN,27,334862,2 BCPC,17,77576,4 FTI,31,528796,2 Average,20,303050,0.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $303 million. That figure was $121 million in NRZ's case. TechnipFMC plc (NYSE:FTI) is the most popular stock in this table. On the other hand Vivint Smart Home, Inc. (NYSE:VVNT) is the least popular one with only 5 bullish hedge fund positions. New Residential Investment Corp (NYSE:NRZ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NRZ is 56.7. 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 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately NRZ wasn't nearly as popular as these 10 stocks and hedge funds that were betting on NRZ were disappointed as the stock returned 8.5% in Q3 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.
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Disclosure: None. This article was originally published at Insider Monkey.
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