Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost more than 25%. Facebook, which was the second most popular stock, lost 20% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, 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 15 large-cap stock picks generated a return of 19.7% during the first 2.5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
City Office REIT Inc (NYSE:CIO) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 6 hedge funds’ portfolios at the end of the fourth quarter of 2018. 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 William Lyon Homes (NYSE:WLH), Ashford Hospitality Trust, Inc. (NYSE:AHT), and Tribune Publishing Company (NASDAQ:TPCO) to gather more data points.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let’s check out the recent hedge fund action encompassing City Office REIT Inc (NYSE:CIO).
What does the smart money think about City Office REIT Inc (NYSE:CIO)?
At the end of the fourth quarter, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2018. On the other hand, there were a total of 6 hedge funds with a bullish position in CIO a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in City Office REIT Inc (NYSE:CIO), which was worth $17.6 million at the end of the fourth quarter. On the second spot was Marathon Asset Management which amassed $1 million worth of shares. Moreover, Millennium Management, Arrowstreet Capital, and Citadel Investment Group were also bullish on City Office REIT Inc (NYSE:CIO), allocating a large percentage of their portfolios to this stock.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: AQR Capital Management. 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 Arrowstreet Capital).
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as City Office REIT Inc (NYSE:CIO) but similarly valued. We will take a look at William Lyon Homes (NYSE:WLH), Ashford Hospitality Trust, Inc. (NYSE:AHT), Tribune Publishing Company (NASDAQ:TPCO), and Jernigan Capital Inc (NYSE:JCAP). All of these stocks’ market caps resemble CIO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WLH | 20 | 108929 | 6 |
| AHT | 15 | 33618 | 3 |
| TPCO | 14 | 23967 | 0 |
| JCAP | 10 | 43755 | 0 |
| Average | 14.75 | 52567 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $20 million in CIO’s case. William Lyon Homes (NYSE:WLH) is the most popular stock in this table. On the other hand Jernigan Capital Inc (NYSE:JCAP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks City Office REIT Inc (NYSE:CIO) is even less popular than JCAP. Hedge funds dodged a bullet by taking a bearish stance towards CIO. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately CIO wasn’t nearly as popular as these 15 stock (hedge fund sentiment was very bearish); CIO investors were disappointed as the stock returned 10.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.
