Hedge Funds Don’t Think Very Highly of Annaly Capital Management, Inc. (NLY)

We started seeing tectonic shifts in the market during the third quarter. Small-cap stocks underperformed the large-cap stocks by more than 10 percentage points between the end of June 2015 and the end of June 2016. A mean reversion in trends bumped small-cap stocks’ return to almost 9% in Q3, outperforming their large-cap peers by 5 percentage points. The momentum in small-cap space hasn’t subsided during this quarter either. Small-cap stocks beat large-cap stocks by another 5 percentage points during the first 7 weeks of this quarter. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were boosting their overall exposure and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Annaly Capital Management, Inc. (NYSE:NLY).

Annaly Capital Management, Inc. (NYSE:NLY) was in 13 hedge funds’ portfolios at the end of the third quarter of 2016. NLY has experienced a decrease in activity from the world’s largest hedge funds lately. There were 17 hedge funds in our database with NLY holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Restaurant Brands International Inc (NYSE:QSR), Discovery Communications Inc. (NASDAQ:DISCK), and SCANA Corporation (NYSE:SCG) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

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How have hedgies been trading Annaly Capital Management, Inc. (NYSE:NLY)?

Heading into the fourth quarter of 2016, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a 24% drop from the second quarter of 2016. By comparison, 10 hedge funds held shares or bullish call options in NLY heading into this year, so hedge fund ownership of the stock is still up by 30% in 2016. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Jim Simons’ Renaissance Technologies has the biggest position in Annaly Capital Management, Inc. (NYSE:NLY), worth close to $73.8 million. The second largest stake is held by Clough Capital Partners, led by Charles Clough, holding a $14.8 million position. Other members of the smart money with similar optimism include Cliff Asness’ AQR Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors, and Israel Englander’s Millennium Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We already know that not all hedge funds are bullish on the stock and some hedge funds actually dumped their positions entirely. At the top of the heap, David E. Shaw’s D E Shaw dumped the largest stake of the 700 funds tracked by Insider Monkey, worth about $41.5 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also cut its stock, about $7.8 million worth.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Annaly Capital Management, Inc. (NYSE:NLY) but similarly valued. We will take a look at Restaurant Brands International Inc (NYSE:QSR), Discovery Communications Inc. (NASDAQ:DISCK), SCANA Corporation (NYSE:SCG), and IMS Health Holdings Inc (NYSE:IMS). This group of stocks’ market caps resemble NLY’s market cap.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $1.23 billion. That figure was $120 million in NLY’s case. Restaurant Brands International Inc (NYSE:QSR) is the most popular stock in this table. On the other hand SCANA Corporation (NYSE:SCG) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Annaly Capital Management, Inc. (NYSE:NLY) is even less popular than SCG. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None