We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Capstead Mortgage Corporation (NYSE:CMO) and determine whether hedge funds skillfully traded this stock.
Capstead Mortgage Corporation (NYSE:CMO) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 12 hedge funds’ portfolios at the end of March. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Sabine Royalty Trust (NYSE:SBR), nLIGHT, Inc. (NASDAQ:LASR), and Plantronics, Inc. (NYSE:PLT) to gather more data points. Our calculations also showed that CMO isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 formulas stock market investors employ to analyze stocks. A pair of the less utilized formulas are hedge fund and insider trading interest. We have shown that, historically, those who follow the best picks of the elite hedge fund managers can trounce the S&P 500 by a healthy margin (see the details here).
Dmitry Balyasny of Balyasny Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to go over the fresh hedge fund action regarding Capstead Mortgage Corporation (NYSE:CMO).
How are hedge funds trading Capstead Mortgage Corporation (NYSE:CMO)?
At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CMO over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Paradice Investment Management held the most valuable stake in Capstead Mortgage Corporation (NYSE:CMO), which was worth $27.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $11.5 million worth of shares. Balyasny Asset Management, Citadel Investment Group, and Winton Capital 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 Paradice Investment Management allocated the biggest weight to Capstead Mortgage Corporation (NYSE:CMO), around 3.1% of its 13F portfolio. Almitas Capital is also relatively very bullish on the stock, setting aside 0.41 percent of its 13F equity portfolio to CMO.
Due to the fact that Capstead Mortgage Corporation (NYSE:CMO) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few hedgies that elected to cut their entire stakes heading into Q4. Interestingly, Ravi Chopra’s Azora Capital cut the biggest investment of all the hedgies followed by Insider Monkey, worth an estimated $3.8 million in stock. Ryan Tolkin (CIO)’s fund, Schonfeld Strategic Advisors, also dumped its stock, about $0.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Capstead Mortgage Corporation (NYSE:CMO) but similarly valued. We will take a look at Sabine Royalty Trust (NYSE:SBR), nLIGHT, Inc. (NASDAQ:LASR), Plantronics, Inc. (NYSE:PLT), and WideOpenWest, Inc. (NYSE:WOW). This group of stocks’ market caps are similar to CMO’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SBR | 4 | 13210 | -2 |
| LASR | 7 | 23474 | 1 |
| PLT | 6 | 14594 | -5 |
| WOW | 15 | 19500 | -1 |
| Average | 8 | 17695 | -1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 8 hedge funds with bullish positions and the average amount invested in these stocks was $18 million. That figure was $48 million in CMO’s case. WideOpenWest, Inc. (NYSE:WOW) is the most popular stock in this table. On the other hand Sabine Royalty Trust (NYSE:SBR) is the least popular one with only 4 bullish hedge fund positions. Capstead Mortgage Corporation (NYSE:CMO) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on CMO as the stock returned 34.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Follow Capstead Mortgage Corp (NYSE:CMO)
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Disclosure: None. This article was originally published at Insider Monkey.
