It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Lennar Corporation (NYSE:LEN).
Lennar Corporation (NYSE:LEN) was in 57 hedge funds’ portfolios at the end of September. LEN shareholders have witnessed an increase in activity from the world’s largest hedge funds of late. There were 53 hedge funds in our database with LEN positions at the end of the previous quarter. Our calculations also showed that LEN isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Glenn Greenberg of Brave Warrior Capital
We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind we’re going to review the key hedge fund action encompassing Lennar Corporation (NYSE:LEN).
How have hedgies been trading Lennar Corporation (NYSE:LEN)?
At the end of the third quarter, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 66 hedge funds with a bullish position in LEN a year ago. 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, Greenhaven Associates held the most valuable stake in Lennar Corporation (NYSE:LEN), which was worth $521.9 million at the end of the third quarter. On the second spot was Eminence Capital which amassed $206.6 million worth of shares. Long Pond Capital, Brave Warrior Capital, and Abrams Bison Investments 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 Abrams Bison Investments allocated the biggest weight to Lennar Corporation (NYSE:LEN), around 10.78% of its 13F portfolio. Greenhaven Associates is also relatively very bullish on the stock, earmarking 10.55 percent of its 13F equity portfolio to LEN.
Consequently, key hedge funds have jumped into Lennar Corporation (NYSE:LEN) headfirst. Owl Creek Asset Management, managed by Jeffrey Altman, initiated the biggest position in Lennar Corporation (NYSE:LEN). Owl Creek Asset Management had $32.2 million invested in the company at the end of the quarter. Aaron Cowen’s Suvretta Capital Management also initiated a $24.5 million position during the quarter. The following funds were also among the new LEN investors: William Harnisch’s Peconic Partners, Zach Schreiber’s Point State Capital, and Curtis Schenker and Craig Effron’s Scoggin.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Lennar Corporation (NYSE:LEN) but similarly valued. We will take a look at KeyCorp (NYSE:KEY), Centene Corp (NYSE:CNC), Splunk Inc (NASDAQ:SPLK), and CDW Corporation (NASDAQ:CDW). This group of stocks’ market values are similar to LEN’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KEY | 28 | 671066 | -3 |
| CNC | 55 | 2034586 | -10 |
| SPLK | 32 | 168599 | 7 |
| CDW | 26 | 1168154 | -3 |
| Average | 35.25 | 1010601 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $1011 million. That figure was $1989 million in LEN’s case. Centene Corp (NYSE:CNC) is the most popular stock in this table. On the other hand CDW Corporation (NASDAQ:CDW) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Lennar Corporation (NYSE:LEN) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on LEN as the stock returned 42.6% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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.
