Should I Avoid Velocity Financial, Inc. (VEL)?

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 Velocity Financial, Inc. (NYSE:VEL).

Velocity Financial, Inc. (NYSE:VEL) was in 5 hedge funds’ portfolios at the end of March. The all time high for this statistic is 8. VEL investors should pay attention to a decrease in hedge fund interest lately. There were 7 hedge funds in our database with VEL positions at the end of the fourth quarter. Our calculations also showed that VEL isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

In the 21st century investor’s toolkit there are many tools stock market investors have at their disposal to assess publicly traded companies. Two of the best tools are hedge fund and insider trading interest. Our researchers have shown that, historically, those who follow the top picks of the top fund managers can outpace the S&P 500 by a superb margin (see the details here). Also, our monthly newsletter’s portfolio of long stock picks returned 206.8% since March 2017 (through May 2021) and beat the S&P 500 Index by more than 115 percentage points. You can download a sample issue of this newsletter on our website .

Phillip Gross of Adage Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, an activist hedge fund owns nearly 40% of this $23 biotech stock and is trying to buy the rest for around $50. So, we recommended a long position to our monthly premium newsletter subscribers. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we’re going to take a gander at the key hedge fund action surrounding Velocity Financial, Inc. (NYSE:VEL).

Do Hedge Funds Think VEL Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the previous quarter. On the other hand, there were a total of 6 hedge funds with a bullish position in VEL a year ago. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

The largest stake in Velocity Financial, Inc. (NYSE:VEL) was held by Beach Point Capital Management, which reported holding $18.2 million worth of stock at the end of December. It was followed by Adage Capital Management with a $15.1 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Laurion Capital Management. In terms of the portfolio weights assigned to each position Beach Point Capital Management allocated the biggest weight to Velocity Financial, Inc. (NYSE:VEL), around 3.99% of its 13F portfolio. Adage Capital Management is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to VEL.

Judging by the fact that Velocity Financial, Inc. (NYSE:VEL) has faced declining sentiment from hedge fund managers, we can see that there were a few hedgies that elected to cut their entire stakes in the first quarter. Interestingly, Ron Mass’s Almitas Capital sold off the biggest stake of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $0.6 million in stock, and Peter Muller’s PDT Partners was right behind this move, as the fund dumped about $0.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 2 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to Velocity Financial, Inc. (NYSE:VEL). We will take a look at scPharmaceuticals Inc. (NASDAQ:SCPH), RGC Resources, Inc. (NASDAQ:RGCO), Agile Therapeutics Inc (NASDAQ:AGRX), ConforMIS, Inc. (NASDAQ:CFMS), Hill International Inc (NYSE:HIL), Codorus Valley Bancorp, Inc. (NASDAQ:CVLY), and Strattec Security Corp. (NASDAQ:STRT). This group of stocks’ market values are similar to VEL’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.4 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $34 million in VEL’s case. ConforMIS, Inc. (NASDAQ:CFMS) is the most popular stock in this table. On the other hand RGC Resources, Inc. (NASDAQ:RGCO) is the least popular one with only 1 bullish hedge fund positions. Velocity Financial, Inc. (NYSE:VEL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for VEL is 38.4. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.4% in 2021 through June 18th and still beat the market by 6.1 percentage points. A small number of hedge funds were also right about betting on VEL as the stock returned 41.6% since the end of the first quarter (through 6/18) and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.