Did Hedge Funds Make The Right Call On Taylor Morrison Home Corp (TMHC) ?

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). 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 Taylor Morrison Home Corp (NYSE:TMHC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Hedge fund interest in Taylor Morrison Home Corp (NYSE:TMHC) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare TMHC to other stocks including AssetMark Financial Holdings, Inc. (NYSE:AMK), Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), and Ingevity Corporation (NYSE:NGVT) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Howard Marks of Oaktree Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to check out the new hedge fund action regarding Taylor Morrison Home Corp (NYSE:TMHC).

What have hedge funds been doing with Taylor Morrison Home Corp (NYSE:TMHC)?

At Q1’s end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TMHC over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Oaktree Capital Management was the largest shareholder of Taylor Morrison Home Corp (NYSE:TMHC), with a stake worth $53.1 million reported as of the end of September. Trailing Oaktree Capital Management was GLG Partners, which amassed a stake valued at $19.8 million. Echo Street Capital Management, Miller Value Partners, and Capital Growth 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 Dendur Capital allocated the biggest weight to Taylor Morrison Home Corp (NYSE:TMHC), around 9.78% of its 13F portfolio. Capital Growth Management is also relatively very bullish on the stock, earmarking 2.42 percent of its 13F equity portfolio to TMHC.

Because Taylor Morrison Home Corp (NYSE:TMHC) has experienced bearish sentiment from the smart money, we can see that there were a few funds who were dropping their positions entirely by the end of the first quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management cut the largest stake of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $68.5 million in stock. Daniel Johnson’s fund, Gillson Capital, also dumped its stock, about $6.3 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Taylor Morrison Home Corp (NYSE:TMHC) but similarly valued. These stocks are AssetMark Financial Holdings, Inc. (NYSE:AMK), Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), Ingevity Corporation (NYSE:NGVT), and Insperity Inc (NYSE:NSP). This group of stocks’ market valuations resemble TMHC’s market valuation.

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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 $98 million. That figure was $215 million in TMHC’s case. Ingevity Corporation (NYSE:NGVT) is the most popular stock in this table. On the other hand AssetMark Financial Holdings, Inc. (NYSE:AMK) is the least popular one with only 4 bullish hedge fund positions. Taylor Morrison Home Corp (NYSE:TMHC) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on TMHC as the stock returned 75.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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