Is LGI Homes Inc (LGIH) Going to Burn These Hedge Funds?

The equity market returns were very disappointing in the third quarter, “thanks” to the slowdown of China’s economy and the weaker-than-expected U.S. economic data. It was not entirely clear whether the broader market sell-off made U.S. equity valuations undervalued, but it definitely made them more attractive. It is worth mentioning that Russell 2000 ETF (IWM) underperformed the broad-market S&P 500 ETF by more than 14 percentage points during the period of June 25, 2015 through October 30, 2015. This clearly points to the fact that most investors, including hedge fund firms and institutional investors, heavily cut their exposure to high-potential (but seemingly riskier) small-cap stocks during the bloody third quarter. So let’s take a glance at the smart money sentiment towards LGI Homes Inc (NASDAQ:LGIH) and see how it was affected.

Is LGI Homes Inc (NASDAQ:LGIH) worth your attention right now? Hedge funds are in a bullish mood. The number of long hedge fund bets inched up by 11 recently. At the end of this article we will also compare LGIH to other stocks, including WMIH Corp (OTCMKTS:WMIH), Navios Maritime Acquisition Corp (NYSE:NNA), and Kelly Services, Inc. (NASDAQ:KELYA) to get a better sense of its popularity.

According to most investors, hedge funds are assumed to be slow, outdated financial vehicles of yesteryear. While there are more than 8000 funds in operation today, Our researchers choose to focus on the aristocrats of this club, approximately 700 funds. These hedge fund managers control the majority of all hedge funds’ total asset base, and by watching their highest performing equity investments, Insider Monkey has spotted numerous investment strategies that have historically outpaced the market. Insider Monkey’s small-cap hedge fund strategy exceeded the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

Now, we’re going to go over the recent action surrounding LGI Homes Inc (NASDAQ:LGIH).

Hedge fund activity in LGI Homes Inc (NASDAQ:LGIH)

At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a boost of 183% from one quarter earlier. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Covalent Capital Partners, managed by Robert Hockett, holds the biggest position in LGI Homes Inc (NASDAQ:LGIH). Covalent Capital Partners has a $15.1 million position in the stock, comprising 3.2% of its 13F portfolio. The second largest stake is held by Ken Heebner’s Capital Growth Management, with a $14.8 million position; the fund has 0.5% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism encompass Steve Pei’s Gratia Capital, Jim Simons’ Renaissance Technologies and Peter Muller’s PDT Partners.

Consequently, key money managers were leading the bulls’ herd. Capital Growth Management assembled the most outsized position in LGI Homes Inc (NASDAQ:LGIH). Renaissance Technologies also initiated a $3.7 million position during the quarter. The other funds with new positions in the stock are PDT Partners, Richard Driehaus’s Driehaus Capital, and Israel Englander’s Millennium Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as LGI Homes Inc (NASDAQ:LGIH) but similarly valued. These stocks are WMIH Corp (OTCMKTS:WMIH), Navios Maritime Acquisition Corp (NYSE:NNA), Kelly Services, Inc. (NASDAQ:KELYA), and Diana Shipping Inc. (NYSE:DSX). This group of stocks’ market valuations resemble LGIH’s market valuation.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $64 million, the same as in LGIH’s case. WMIH Corp (OTCMKTS:WMIH) is the most popular stock in this table. On the other hand Kelly Services, Inc. (NASDAQ:KELYA) is the least popular one with only 10 bullish hedge fund positions. LGI Homes Inc (NASDAQ:LGIH) is not the most popular stock in this group, but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard WMIH might be a better candidate to consider a long position.