Hedge Funds Are Coming Back To Sunstone Hotel Investors Inc (SHO)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Sunstone Hotel Investors Inc (NYSE:SHO) and determine whether hedge funds had an edge regarding this stock.

Sunstone Hotel Investors Inc (NYSE:SHO) was in 23 hedge funds’ portfolios at the end of June. The all time high for this statistics is 25. SHO investors should pay attention to an increase in hedge fund interest of late. There were 19 hedge funds in our database with SHO holdings at the end of March. Our calculations also showed that SHO 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.

Charles Davidson of Wexford 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 take a look at the fresh hedge fund action encompassing Sunstone Hotel Investors Inc (NYSE:SHO).

What does smart money think about Sunstone Hotel Investors Inc (NYSE:SHO)?

At second quarter’s end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in SHO a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Long Pond Capital held the most valuable stake in Sunstone Hotel Investors Inc (NYSE:SHO), which was worth $55.1 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $37.1 million worth of shares. Echo Street Capital Management, Balyasny Asset Management, and Waterfront Capital Partners 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 Waterfront Capital Partners allocated the biggest weight to Sunstone Hotel Investors Inc (NYSE:SHO), around 2.22% of its 13F portfolio. Long Pond Capital is also relatively very bullish on the stock, earmarking 2.18 percent of its 13F equity portfolio to SHO.

Now, specific money managers have been driving this bullishness. Long Pond Capital, managed by John Khoury, assembled the biggest position in Sunstone Hotel Investors Inc (NYSE:SHO). Long Pond Capital had $55.1 million invested in the company at the end of the quarter. Greg Poole’s Echo Street Capital Management also made a $25.2 million investment in the stock during the quarter. The other funds with brand new SHO positions are Eduardo Abush’s Waterfront Capital Partners, Benjamin A. Smith’s Laurion Capital Management, and Charles Davidson and Joseph Jacobs’s Wexford Capital.

Let’s also examine hedge fund activity in other stocks similar to Sunstone Hotel Investors Inc (NYSE:SHO). These stocks are WESCO International, Inc. (NYSE:WCC), Euronav NV (NYSE:EURN), PennyMac Mortgage Investment Trust (NYSE:PMT), Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL), Moog Inc (NYSE:MOG), Chart Industries, Inc. (NASDAQ:GTLS), and Independent Bank Group Inc (NASDAQ:IBTX). This group of stocks’ market valuations match SHO’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.3 hedge funds with bullish positions and the average amount invested in these stocks was $214 million. That figure was $180 million in SHO’s case. WESCO International, Inc. (NYSE:WCC) is the most popular stock in this table. On the other hand Independent Bank Group Inc (NASDAQ:IBTX) is the least popular one with only 9 bullish hedge fund positions. Sunstone Hotel Investors Inc (NYSE:SHO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SHO is 64.6. 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 SHO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SHO were disappointed as the stock returned -2.6% 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.

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