Do Hedge Funds Love ARMOUR Residential REIT, Inc. (ARR)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded ARMOUR Residential REIT, Inc. (NYSE:ARR) and determine whether the smart money was really smart about this stock.

ARMOUR Residential REIT, Inc. (NYSE:ARR) investors should pay attention to a decrease in activity from the world’s largest hedge funds in recent months. ARR was in 10 hedge funds’ portfolios at the end of March. There were 11 hedge funds in our database with ARR holdings at the end of the previous quarter. Our calculations also showed that ARR isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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. 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.

Dmitry Balyasny of Balyasny Asset 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 let’s take a gander at the key hedge fund action encompassing ARMOUR Residential REIT, Inc. (NYSE:ARR).

How are hedge funds trading ARMOUR Residential REIT, Inc. (NYSE:ARR)?

At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ARR over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in ARMOUR Residential REIT, Inc. (NYSE:ARR) was held by Renaissance Technologies, which reported holding $8.2 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $3.2 million position. Other investors bullish on the company included Winton Capital Management, Marshall Wace LLP, and D E Shaw. In terms of the portfolio weights assigned to each position Winton Capital Management allocated the biggest weight to ARMOUR Residential REIT, Inc. (NYSE:ARR), around 0.07% of its 13F portfolio. Ellington is also relatively very bullish on the stock, designating 0.05 percent of its 13F equity portfolio to ARR.

Due to the fact that ARMOUR Residential REIT, Inc. (NYSE:ARR) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there exists a select few money managers who sold off their entire stakes by the end of the first quarter. Interestingly, Dmitry Balyasny’s Balyasny Asset Management cut the biggest stake of the “upper crust” of funds watched by Insider Monkey, worth close to $7.2 million in stock, and David Costen Haley’s HBK Investments was right behind this move, as the fund dumped about $1.1 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 1 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as ARMOUR Residential REIT, Inc. (NYSE:ARR) but similarly valued. We will take a look at Niu Technologies (NASDAQ:NIU), Conduent Incorporated (NYSE:CNDT), trivago N.V. (NASDAQ:TRVG), and RAPT Therapeutics, Inc. (NASDAQ:RAPT). This group of stocks’ market valuations are closest to ARR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $15 million in ARR’s case. Conduent Incorporated (NYSE:CNDT) is the most popular stock in this table. On the other hand Niu Technologies (NASDAQ:NIU) is the least popular one with only 5 bullish hedge fund positions. ARMOUR Residential REIT, Inc. (NYSE:ARR) 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ARR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ARR were disappointed as the stock returned 7.7% 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.

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