Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 Realty Income Corporation (NYSE:O).
Realty Income Corporation (NYSE:O) shareholders have witnessed an increase in hedge fund interest in recent months. O was in 26 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 18 hedge funds in our database with O holdings at the end of the previous quarter. Our calculations also showed that O isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Keeping this in mind we’re going to analyze the recent hedge fund action encompassing Realty Income Corporation (NYSE:O).
How are hedge funds trading Realty Income Corporation (NYSE:O)?
At the end of the fourth quarter, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 44% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards O over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Zimmer Partners, managed by Stuart J. Zimmer, holds the number one position in Realty Income Corporation (NYSE:O). Zimmer Partners has a $191.5 million position in the stock, comprising 2.6% of its 13F portfolio. Sitting at the No. 2 spot is Israel Englander of Millennium Management, with a $42.5 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism include Ken Griffin’s Citadel Investment Group, Phill Gross and Robert Atchinson’s Adage Capital Management and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Hill Winds Capital allocated the biggest weight to Realty Income Corporation (NYSE:O), around 2.83% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, designating 2.65 percent of its 13F equity portfolio to O.
As industrywide interest jumped, key money managers were leading the bulls’ herd. Paloma Partners, managed by Donald Sussman, created the most outsized position in Realty Income Corporation (NYSE:O). Paloma Partners had $11.1 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $10.3 million investment in the stock during the quarter. The other funds with brand new O positions are Daniel S. Och’s OZ Management, Matthew Tewksbury’s Stevens Capital Management, and Alec Litowitz and Ross Laser’s Magnetar Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Realty Income Corporation (NYSE:O) but similarly valued. These stocks are STMicroelectronics N.V. (NYSE:STM), Waste Connections, Inc. (NYSE:WCN), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), and Entergy Corporation (NYSE:ETR). This group of stocks’ market values resemble O’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| STM | 17 | 146213 | 4 |
| WCN | 37 | 623995 | 3 |
| ALXN | 48 | 2927643 | 0 |
| ETR | 31 | 1402438 | 2 |
| Average | 33.25 | 1275072 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $1275 million. That figure was $394 million in O’s case. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is the most popular stock in this table. On the other hand STMicroelectronics N.V. (NYSE:STM) is the least popular one with only 17 bullish hedge fund positions. Realty Income Corporation (NYSE:O) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but still beat the market by 3.1 percentage points. A small number of hedge funds were also right about betting on O as the stock returned 0.5% during the same time period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
