Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is M/I Homes Inc (NYSE:MHO) going to take off soon? The best stock pickers are taking a bullish view. The number of bullish hedge fund bets rose by 8 in recent months. Our calculations also showed that MHO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 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.
Matthew Lindenbaum of Basswood Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the key hedge fund action regarding M/I Homes Inc (NYSE:MHO).
How have hedgies been trading M/I Homes Inc (NYSE:MHO)?
Heading into the fourth quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 80% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in MHO a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, Basswood Capital was the largest shareholder of M/I Homes Inc (NYSE:MHO), with a stake worth $14.5 million reported as of the end of September. Trailing Basswood Capital was Royce & Associates, which amassed a stake valued at $12.6 million. Millennium Management, AQR Capital Management, and Arrowstreet Capital 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 Basswood Capital allocated the biggest weight to M/I Homes Inc (NYSE:MHO), around 1.06% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, designating 0.61 percent of its 13F equity portfolio to MHO.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in M/I Homes Inc (NYSE:MHO). Arrowstreet Capital had $6 million invested in the company at the end of the quarter. Bruce Kovner’s Caxton Associates also initiated a $1.5 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace’s Marshall Wace, John Overdeck and David Siegel’s Two Sigma Advisors, and Michael Gelband’s ExodusPoint Capital.
Let’s check out hedge fund activity in other stocks similar to M/I Homes Inc (NYSE:MHO). We will take a look at CSW Industrials, Inc. (NASDAQ:CSWI), Addus Homecare Corporation (NASDAQ:ADUS), Talend S.A. (NASDAQ:TLND), and Omega Flex, Inc. (NASDAQ:OFLX). This group of stocks’ market valuations match MHO’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CSWI | 19 | 53910 | 0 |
| ADUS | 23 | 158689 | 6 |
| TLND | 28 | 421421 | 4 |
| OFLX | 4 | 5556 | 1 |
| Average | 18.5 | 159894 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $160 million. That figure was $63 million in MHO’s case. Talend S.A. (NASDAQ:TLND) is the most popular stock in this table. On the other hand Omega Flex, Inc. (NASDAQ:OFLX) is the least popular one with only 4 bullish hedge fund positions. M/I Homes Inc (NYSE:MHO) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on MHO as the stock returned 17.6% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
