At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.
Meritage Homes Corp (NYSE:MTH) investors should be aware of an increase in hedge fund sentiment in recent months. Our calculations also showed that MTH isn’t among the 30 most popular stocks among hedge funds.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
We’re going to take a look at the recent hedge fund action encompassing Meritage Homes Corp (NYSE:MTH).
How are hedge funds trading Meritage Homes Corp (NYSE:MTH)?
Heading into the second quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 8% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in MTH over the last 15 quarters. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
More specifically, Fisher Asset Management was the largest shareholder of Meritage Homes Corp (NYSE:MTH), with a stake worth $59.9 million reported as of the end of March. Trailing Fisher Asset Management was Echo Street Capital Management, which amassed a stake valued at $51.8 million. East Side Capital (RR Partners), D E Shaw, and GLG Partners were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, some big names were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Meritage Homes Corp (NYSE:MTH). Arrowstreet Capital had $5.6 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $0.8 million investment in the stock during the quarter. The following funds were also among the new MTH investors: Mike Vranos’s Ellington, Michael Platt and William Reeves’s BlueCrest Capital Mgmt., and Ken Griffin’s Citadel Investment Group.
Let’s now take a look at hedge fund activity in other stocks similar to Meritage Homes Corp (NYSE:MTH). These stocks are Hilltop Holdings Inc. (NYSE:HTH), Delphi Technologies PLC (NYSE:DLPH), Core-Mark Holding Company, Inc. (NASDAQ:CORE), and Audentes Therapeutics, Inc. (NASDAQ:BOLD). This group of stocks’ market values are closest to MTH’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HTH | 19 | 123299 | 5 |
| DLPH | 24 | 274206 | 6 |
| CORE | 24 | 76068 | 4 |
| BOLD | 26 | 597594 | 2 |
| Average | 23.25 | 267792 | 4.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $268 million. That figure was $177 million in MTH’s case. Audentes Therapeutics, Inc. (NASDAQ:BOLD) is the most popular stock in this table. On the other hand Hilltop Holdings Inc. (NYSE:HTH) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Meritage Homes Corp (NYSE:MTH) is even less popular than HTH. Hedge funds clearly dropped the ball on MTH as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on MTH as the stock returned 14.8% during the same period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
