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 Starwood Property Trust, Inc. (NYSE:STWD) and determine whether hedge funds had an edge regarding this stock.
Starwood Property Trust, Inc. (NYSE:STWD) has experienced a decrease in enthusiasm from smart money recently. Starwood Property Trust, Inc. (NYSE:STWD) was in 22 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. There were 23 hedge funds in our database with STWD holdings at the end of March. Our calculations also showed that STWD isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
David Siegel of Two Sigma Advisors
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s analyze the key hedge fund action regarding Starwood Property Trust, Inc. (NYSE:STWD).
What have hedge funds been doing with Starwood Property Trust, Inc. (NYSE:STWD)?
Heading into the third quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in STWD over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Cardinal Capital was the largest shareholder of Starwood Property Trust, Inc. (NYSE:STWD), with a stake worth $59.1 million reported as of the end of September. Trailing Cardinal Capital was Citadel Investment Group, which amassed a stake valued at $22.7 million. Arrowstreet Capital, Two Sigma Advisors, and Millennium Management 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 Birch Run Capital allocated the biggest weight to Starwood Property Trust, Inc. (NYSE:STWD), around 2.89% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, designating 2.47 percent of its 13F equity portfolio to STWD.
Because Starwood Property Trust, Inc. (NYSE:STWD) has witnessed a decline in interest from the smart money, logic holds that there lies a certain “tier” of hedge funds that decided to sell off their entire stakes last quarter. It’s worth mentioning that Renaissance Technologies dumped the largest position of all the hedgies tracked by Insider Monkey, worth an estimated $5.4 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dumped about $5 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 1 funds last quarter.
Let’s now review hedge fund activity in other stocks similar to Starwood Property Trust, Inc. (NYSE:STWD). These stocks are Norwegian Cruise Line Holdings Ltd (NYSE:NCLH), Youdao, Inc. (NYSE:DAO), Healthequity Inc (NASDAQ:HQY), DXC Technology Company (NYSE:DXC), Jefferies Financial Group Inc. (NYSE:JEF), Ashland Global Holdings Inc.. (NYSE:ASH), and TerraForm Power Inc (NASDAQ:TERP). This group of stocks’ market valuations are similar to STWD’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NCLH | 28 | 170565 | 8 |
| DAO | 13 | 381255 | 7 |
| HQY | 18 | 164752 | -1 |
| DXC | 40 | 529806 | -1 |
| JEF | 37 | 586275 | 7 |
| ASH | 32 | 976347 | 0 |
| TERP | 21 | 235830 | 4 |
| Average | 27 | 434976 | 3.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $435 million. That figure was $168 million in STWD’s case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand Youdao, Inc. (NYSE:DAO) is the least popular one with only 13 bullish hedge fund positions. Starwood Property Trust, Inc. (NYSE:STWD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for STWD is 45.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately STWD wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); STWD investors were disappointed as the stock returned 4% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Follow Starwood Property Trust Inc. (NYSE:STWD)
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Disclosure: None. This article was originally published at Insider Monkey.
