Should You Buy MFA Financial, Inc. (MFA)?

Investing in small-cap stocks has historically been a way to outperform the market, as small-cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of MFA Financial, Inc. (NYSE:MFA).

MFA Financial, Inc. (NYSE:MFA) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds’ portfolios at the end of September. At the end of this article, we will also compare MFA to other stocks including American States Water Co (NYSE:AWR), TopBuild Corp (NYSE:BLD), and Legg Mason, Inc. (NYSE:LM) to get a better sense of its popularity.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

According to most investors, hedge funds are seen as slow, old financial vehicles of the past. While there are over 8000 funds in operation at the moment, Our experts choose to focus on the leaders of this group, approximately 750 funds. These investment experts orchestrate the majority of all hedge funds’ total asset base, and by shadowing their top picks, Insider Monkey has discovered a few investment strategies that have historically outpaced Mr. Market. Insider Monkey’s flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points per year since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update.

Andy Redleaf of Whitebox Advisors

We leave no stone unturned when looking for the next great investment idea. For example, Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the key hedge fund action regarding MFA Financial, Inc. (NYSE:MFA).

Hedge fund activity in MFA Financial, Inc. (NYSE:MFA)

At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MFA over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

More specifically, Citadel Investment Group was the largest shareholder of MFA Financial, Inc. (NYSE:MFA), with a stake worth $30 million reported as of the end of September. Trailing Citadel Investment Group was Renaissance Technologies, which amassed a stake valued at $20.6 million. Millennium Management, Two Sigma Advisors, and D E Shaw 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, Neo Ivy Capital allocated the biggest weight to MFA Financial, Inc. (NYSE:MFA), around 0.43% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, setting aside 0.37 percent of its 13F equity portfolio to MFA.

Because MFA Financial, Inc. (NYSE:MFA) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of money managers who sold off their full holdings last quarter. At the top of the heap, Andy Redleaf’s Whitebox Advisors sold off the biggest position of all the hedgies tracked by Insider Monkey, comprising an estimated $1.8 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund said goodbye to about $1.2 million worth. These bearish behaviors are intriguing, to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as MFA Financial, Inc. (NYSE:MFA) but similarly valued. These stocks are American States Water Co (NYSE:AWR), TopBuild Corp (NYSE:BLD), Legg Mason, Inc. (NYSE:LM), and The Timken Company (NYSE:TKR). This group of stocks’ market valuations matches MFA’s market valuation.

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As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $220 million. That figure was $97 million in MFA’s case. The Timken Company (NYSE:TKR) is the most popular stock in this table. On the other hand, American States Water Co (NYSE:AWR) is the least popular one with only 14 bullish hedge fund positions. MFA Financial, Inc. (NYSE:MFA) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately, MFA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); MFA investors were disappointed as the stock returned 4.1% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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