We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended December 31, so let’s proceed with the discussion of the hedge fund sentiment on Two Harbors Investment Corp (NYSE:TWO).
Is Two Harbors Investment Corp (NYSE:TWO) a worthy stock to buy now? Hedge funds are taking a bullish view. The number of long hedge fund positions rose by 4 in recent months. Our calculations also showed that TWO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). TWO was in 20 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 16 hedge funds in our database with TWO positions at the end of the previous quarter.
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.
Richard Driehaus of Driehaus Capital
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. Now let’s view the recent hedge fund action surrounding Two Harbors Investment Corp (NYSE:TWO).
How have hedgies been trading Two Harbors Investment Corp (NYSE:TWO)?
At Q4’s end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 25% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards TWO over the last 18 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
Among these funds, Clough Capital Partners held the most valuable stake in Two Harbors Investment Corp (NYSE:TWO), which was worth $32.1 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $29.2 million worth of shares. Citadel Investment Group, Winton Capital Management, and Driehaus Capital 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 Clough Capital Partners allocated the biggest weight to Two Harbors Investment Corp (NYSE:TWO), around 2.74% of its 13F portfolio. Callodine Capital Management is also relatively very bullish on the stock, dishing out 1.88 percent of its 13F equity portfolio to TWO.
Now, some big names were leading the bulls’ herd. Clough Capital Partners, managed by Charles Clough, created the largest position in Two Harbors Investment Corp (NYSE:TWO). Clough Capital Partners had $32.1 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also made a $8.2 million investment in the stock during the quarter. The other funds with brand new TWO positions are Minhua Zhang’s Weld Capital Management, Michael Gelband’s ExodusPoint Capital, and Mike Vranos’s Ellington.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Two Harbors Investment Corp (NYSE:TWO) but similarly valued. These stocks are Clearway Energy, Inc. (NYSE:CWEN), Cinemark Holdings, Inc. (NYSE:CNK), RBC Bearings Incorporated (NASDAQ:ROLL), and TriNet Group Inc (NYSE:TNET). This group of stocks’ market caps resemble TWO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CWEN | 23 | 233438 | 2 |
| CNK | 22 | 219355 | -1 |
| ROLL | 10 | 48753 | 3 |
| TNET | 20 | 388310 | -1 |
| Average | 18.75 | 222464 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $222 million. That figure was $110 million in TWO’s case. Clearway Energy, Inc. (NYSE:CWEN) is the most popular stock in this table. On the other hand RBC Bearings Incorporated (NASDAQ:ROLL) is the least popular one with only 10 bullish hedge fund positions. Two Harbors Investment Corp (NYSE:TWO) 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. 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately TWO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TWO were disappointed as the stock returned -68% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
