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 HomeStreet Inc (NASDAQ:HMST) and determine whether hedge funds had an edge regarding this stock.
HomeStreet Inc (NASDAQ:HMST) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. HMST was in 13 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with HMST holdings at the end of the previous quarter. Our calculations also showed that HMST 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.
Fred Cummings of Elizabeth Park Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 most profitable companies in the world to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind we’re going to analyze the fresh hedge fund action surrounding HomeStreet Inc (NASDAQ:HMST).
Hedge fund activity in HomeStreet Inc (NASDAQ:HMST)
At the end of the first quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HMST over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies, holds the largest position in HomeStreet Inc (NASDAQ:HMST). Renaissance Technologies has a $12.6 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is AQR Capital Management, led by Cliff Asness, holding a $7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish contain Fred Cummings’s Elizabeth Park Capital Management, D. E. Shaw’s D E Shaw and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Elizabeth Park Capital Management allocated the biggest weight to HomeStreet Inc (NASDAQ:HMST), around 4.54% of its 13F portfolio. Interval Partners is also relatively very bullish on the stock, setting aside 0.04 percent of its 13F equity portfolio to HMST.
Because HomeStreet Inc (NASDAQ:HMST) has witnessed falling interest from the smart money, logic holds that there was a specific group of hedgies who sold off their positions entirely in the first quarter. Intriguingly, Paul Tudor Jones’s Tudor Investment Corp cut the biggest stake of the 750 funds tracked by Insider Monkey, totaling close to $0.4 million in stock, and Mike Vranos’s Ellington was right behind this move, as the fund dropped about $0.3 million worth. These moves are important to note, as aggregate hedge fund interest fell by 2 funds in the first quarter.
Let’s go over hedge fund activity in other stocks similar to HomeStreet Inc (NASDAQ:HMST). These stocks are i3 Verticals, Inc. (NASDAQ:IIIV), Rattler Midstream LP (NASDAQ:RTLR), TrustCo Bank Corp NY (NASDAQ:TRST), and Relmada Therapeutics, Inc. (NASDAQ:RLMD). This group of stocks’ market values match HMST’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IIIV | 11 | 41532 | -1 |
| RTLR | 9 | 43773 | 1 |
| TRST | 11 | 30498 | -3 |
| RLMD | 9 | 149193 | 1 |
| Average | 10 | 66249 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $66 million. That figure was $38 million in HMST’s case. i3 Verticals, Inc. (NASDAQ:IIIV) is the most popular stock in this table. On the other hand Rattler Midstream LP (NASDAQ:RTLR) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks HomeStreet Inc (NASDAQ:HMST) is more popular among hedge funds. 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 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. Unfortunately HMST wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HMST were disappointed as the stock returned 7.1% during the second quarter (through June 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
