Should You Buy Diversified Healthcare Trust (DHC)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Diversified Healthcare Trust (NASDAQ:DHC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Diversified Healthcare Trust (NASDAQ:DHC) was in 10 hedge funds’ portfolios at the end of March. DHC investors should be aware of an increase in enthusiasm from smart money in recent months. There were 9 hedge funds in our database with DHC positions at the end of the previous quarter. Our calculations also showed that DHC 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.

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 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Peter Rathjens of Arrowstreet Capital

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. Now let’s take a peek at the key hedge fund action encompassing Diversified Healthcare Trust (NASDAQ:DHC).

Hedge fund activity in Diversified Healthcare Trust (NASDAQ:DHC)

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the fourth quarter of 2019. By comparison, 17 hedge funds held shares or bullish call options in DHC a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Arrowstreet Capital was the largest shareholder of Diversified Healthcare Trust (NASDAQ:DHC), with a stake worth $6.3 million reported as of the end of September. Trailing Arrowstreet Capital was Two Sigma Advisors, which amassed a stake valued at $2.3 million. Citadel Investment Group, AQR Capital Management, and Renaissance Technologies 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 Tudor Investment Corp allocated the biggest weight to Diversified Healthcare Trust (NASDAQ:DHC), around 0.02% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, designating 0.02 percent of its 13F equity portfolio to DHC.

Now, specific money managers have jumped into Diversified Healthcare Trust (NASDAQ:DHC) headfirst. Citadel Investment Group, managed by Ken Griffin, created the most valuable position in Diversified Healthcare Trust (NASDAQ:DHC). Citadel Investment Group had $1.1 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also initiated a $0.3 million position during the quarter. The other funds with new positions in the stock are Greg Eisner’s Engineers Gate Manager, Karim Abbadi and Edward McBride’s Centiva Capital, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Diversified Healthcare Trust (NASDAQ:DHC). These stocks are KKR Real Estate Finance Trust Inc. (NYSE:KREF), SunPower Corporation (NASDAQ:SPWR), Colony Capital Inc (NYSE:CLNY), and Kadant Inc. (NYSE:KAI). This group of stocks’ market values match DHC’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $12 million in DHC’s case. Colony Capital Inc (NYSE:CLNY) is the most popular stock in this table. On the other hand KKR Real Estate Finance Trust Inc. (NYSE:KREF) is the least popular one with only 7 bullish hedge fund positions. Diversified Healthcare Trust (NASDAQ:DHC) is not the least popular stock in this group but hedge fund interest is still below 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 beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on DHC, though not to the same extent, as the stock returned 22.4% during the second quarter and outperformed the market.

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