Two Harbors Investment Corp (TWO): Are Hedge Funds Right About This Stock?

Two Harbors Investment Corp (NYSE:TWO) was in 24 hedge funds’ portfolio at the end of the first quarter of 2013. TWO has seen an increase in hedge fund sentiment lately. There were 19 hedge funds in our database with TWO holdings at the end of the previous quarter.

In the eyes of most investors, hedge funds are perceived as worthless, old financial tools of the past. While there are greater than 8000 funds trading at present, we choose to focus on the masters of this club, about 450 funds. It is widely believed that this group has its hands on most of the hedge fund industry’s total capital, and by paying attention to their highest performing investments, we have unsheathed a number of investment strategies that have historically beaten Mr. Market. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points a year for a decade in our back tests, and since we’ve started sharing our picks with our subscribers at the end of August 2012, we have trumped the S&P 500 index by 23.3 percentage points in 8 months (see the details here).

Just as beneficial, optimistic insider trading sentiment is another way to break down the investments you’re interested in. There are lots of reasons for a corporate insider to cut shares of his or her company, but just one, very obvious reason why they would initiate a purchase. Various empirical studies have demonstrated the impressive potential of this method if investors understand where to look (learn more here).

With all of this in mind, let’s take a look at the latest action encompassing Two Harbors Investment Corp (NYSE:TWO).

What does the smart money think about Two Harbors Investment Corp (NYSE:TWO)?

At the end of the first quarter, a total of 24 of the hedge funds we track were bullish in this stock, a change of 26% from the first quarter. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially.

According to our comprehensive database, SAB Capital Management, managed by Brian Jackelow, holds the biggest position in Two Harbors Investment Corp (NYSE:TWO). SAB Capital Management has a $152.9 million position in the stock, comprising 12% of its 13F portfolio. Coming in second is Bain Capital of Brookside Capital, with a $88.7 million position; the fund has 2% of its 13F portfolio invested in the stock. Other hedge funds that hold long positions include Steven Cohen’s SAC Capital Advisors, Ken Griffin’s Citadel Investment Group and David Tepper’s Appaloosa Management LP.

Consequently, key hedge funds were leading the bulls’ herd. Brookside Capital, managed by Bain Capital, assembled the most valuable position in Two Harbors Investment Corp (NYSE:TWO). Brookside Capital had 88.7 million invested in the company at the end of the quarter. Jim Simons’s Renaissance Technologies also initiated a $24.2 million position during the quarter. The other funds with brand new TWO positions are Alec Litowitz and Ross Laser’s Magnetar Capital, Bruce Kovner’s Caxton Associates LP, and Anil Stevens and Glenn Shapiro’s Parameter Capital Management.

What have insiders been doing with Two Harbors Investment Corp (NYSE:TWO)?

Insider purchases made by high-level executives is best served when the company in question has experienced transactions within the past 180 days. Over the last half-year time frame, Two Harbors Investment Corp (NYSE:TWO) has seen 4 unique insiders buying, and zero insider sales (see the details of insider trades here).

Let’s check out hedge fund and insider activity in other stocks similar to Two Harbors Investment Corp (NYSE:TWO). These stocks are Essex Property Trust Inc (NYSE:ESS), BRE Properties Inc (NYSE:BRE), Senior Housing Properties Trust (NYSE:SNH), American Campus Communities, Inc. (NYSE:ACC), and Apartment Investment and Management Co. (NYSE:AIV). All of these stocks are in the reit – residential industry and their market caps are closest to TWO’s market cap.

With the results shown by the aforementioned studies, retail investors must always keep an eye on hedge fund and insider trading activity, and Two Harbors Investment Corp (NYSE:TWO) applies perfectly to this mantra.

Click here to learn why you should track hedge funds