We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether Invesco Mortgage Capital Inc (NYSE:IVR) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Is Invesco Mortgage Capital Inc (NYSE:IVR) a bargain? Prominent investors are taking a pessimistic view. The number of bullish hedge fund bets were trimmed by 4 in recent months. Our calculations also showed that IVR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). IVR was in 15 hedge funds’ portfolios at the end of December. There were 19 hedge funds in our database with IVR holdings at the end of the previous quarter.
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 41 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.
Matthew Hulsizer of PEAK6 Capital
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a look at the recent hedge fund action regarding Invesco Mortgage Capital Inc (NYSE:IVR).
Hedge fund activity in Invesco Mortgage Capital Inc (NYSE:IVR)
At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in IVR over the last 18 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Invesco Mortgage Capital Inc (NYSE:IVR) was held by Renaissance Technologies, which reported holding $38.3 million worth of stock at the end of September. It was followed by Winton Capital Management with a $23.5 million position. Other investors bullish on the company included Citadel Investment Group, Interval Partners, and AQR Capital Management. In terms of the portfolio weights assigned to each position Winton Capital Management allocated the biggest weight to Invesco Mortgage Capital Inc (NYSE:IVR), around 0.33% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, setting aside 0.16 percent of its 13F equity portfolio to IVR.
Judging by the fact that Invesco Mortgage Capital Inc (NYSE:IVR) has experienced bearish sentiment from the smart money, we can see that there exists a select few hedgies that elected to cut their entire stakes last quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management cut the biggest investment of the “upper crust” of funds tracked by Insider Monkey, valued at about $11.7 million in stock. Anand Parekh’s fund, Alyeska Investment Group, also cut its stock, about $9.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds last quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Invesco Mortgage Capital Inc (NYSE:IVR) but similarly valued. These stocks are Carpenter Technology Corporation (NYSE:CRS), Prospect Capital Corporation (NASDAQ:PSEC), ExlService Holdings, Inc. (NASDAQ:EXLS), and Varonis Systems Inc (NASDAQ:VRNS). This group of stocks’ market valuations are closest to IVR’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CRS | 16 | 73936 | 2 |
| PSEC | 15 | 72643 | 3 |
| EXLS | 18 | 48631 | 2 |
| VRNS | 18 | 455392 | -7 |
| Average | 16.75 | 162651 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $85 million in IVR’s case. ExlService Holdings, Inc. (NASDAQ:EXLS) is the most popular stock in this table. On the other hand Prospect Capital Corporation (NASDAQ:PSEC) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Invesco Mortgage Capital Inc (NYSE:IVR) is even less popular than PSEC. Hedge funds dodged a bullet by taking a bearish stance towards IVR. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately IVR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); IVR investors were disappointed as the stock returned -84.7% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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.
