Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
Cherry Hill Mortgage Investment Corp (NYSE:CHMI) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 9 hedge funds’ portfolios at the end of September. At the end of this article we will also compare CHMI to other stocks including Value Line, Inc. (NASDAQ:VALU), Great Panther Silver Ltd (NYSEAMERICAN:GPL), and Codorus Valley Bancorp, Inc. (NASDAQ:CVLY) to get a better sense of its popularity.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
J. Carlo Cannell of Cannell Capital
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to review the recent hedge fund action encompassing Cherry Hill Mortgage Investment Corp (NYSE:CHMI).
What does smart money think about Cherry Hill Mortgage Investment Corp (NYSE:CHMI)?
Heading into the fourth quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CHMI over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, founded by Jim Simons, holds the most valuable position in Cherry Hill Mortgage Investment Corp (NYSE:CHMI). Renaissance Technologies has a $8.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Coming in second is Israel Englander of Millennium Management, with a $4.1 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other peers that hold long positions comprise David Harding’s Winton Capital Management, J. Carlo Cannell’s Cannell Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Almitas Capital allocated the biggest weight to Cherry Hill Mortgage Investment Corp (NYSE:CHMI), around 0.52% of its 13F portfolio. Cannell Capital is also relatively very bullish on the stock, setting aside 0.24 percent of its 13F equity portfolio to CHMI.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Arrowstreet Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Almitas Capital).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cherry Hill Mortgage Investment Corp (NYSE:CHMI) but similarly valued. These stocks are Value Line, Inc. (NASDAQ:VALU), Great Panther Silver Ltd (NYSEAMERICAN:GPL), Codorus Valley Bancorp, Inc. (NASDAQ:CVLY), and Ooma Inc (NYSE:OOMA). This group of stocks’ market valuations are closest to CHMI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VALU | 2 | 3257 | 0 |
| GPL | 5 | 3159 | 0 |
| CVLY | 5 | 17100 | 0 |
| OOMA | 14 | 55956 | -1 |
| Average | 6.5 | 19868 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $20 million. That figure was $18 million in CHMI’s case. Ooma Inc (NYSE:OOMA) is the most popular stock in this table. On the other hand Value Line, Inc. (NASDAQ:VALU) is the least popular one with only 2 bullish hedge fund positions. Cherry Hill Mortgage Investment Corp (NYSE:CHMI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on CHMI as the stock returned 14.4% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
