Were Hedge Funds Right About Souring On Lexington Realty Trust (LXP)?

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 Lexington Realty Trust (NYSE:LXP) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Lexington Realty Trust (NYSE:LXP) shareholders have witnessed a decrease in enthusiasm from smart money lately. Our calculations also showed that LXP 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Noam Gottesman of GLG Partners

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 we’re going to review the new hedge fund action regarding Lexington Realty Trust (NYSE:LXP).

What have hedge funds been doing with Lexington Realty Trust (NYSE:LXP)?

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from one quarter earlier. On the other hand, there were a total of 18 hedge funds with a bullish position in LXP a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Among these funds, Two Sigma Advisors held the most valuable stake in Lexington Realty Trust (NYSE:LXP), which was worth $13.3 million at the end of the third quarter. On the second spot was Forward Management which amassed $12.1 million worth of shares. Winton Capital Management, AQR Capital Management, and Royce & Associates 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 Forward Management allocated the biggest weight to Lexington Realty Trust (NYSE:LXP), around 2.35% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.17 percent of its 13F equity portfolio to LXP.

Judging by the fact that Lexington Realty Trust (NYSE:LXP) has witnessed a decline in interest from the smart money, it’s safe to say that there is a sect of hedgies who were dropping their entire stakes by the end of the first quarter. It’s worth mentioning that Jeffrey Hinkle’s Shoals Capital Management sold off the biggest position of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $8.1 million in stock, and  Renaissance Technologies was right behind this move, as the fund sold off about $7.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks similar to Lexington Realty Trust (NYSE:LXP). These stocks are Air Lease Corp (NYSE:AL), Blackstone Mortgage Trust Inc (NYSE:BXMT), United States Cellular Corporation (NYSE:USM), and AAON, Inc. (NASDAQ:AAON). This group of stocks’ market valuations are closest to LXP’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $138 million. That figure was $41 million in LXP’s case. Air Lease Corp (NYSE:AL) is the most popular stock in this table. On the other hand AAON, Inc. (NASDAQ:AAON) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Lexington Realty Trust (NYSE:LXP) is even less popular than AAON. Hedge funds dodged a bullet by taking a bearish stance towards LXP. Our calculations showed that the top 10 most popular hedge fund stocks 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 managed to beat the market by 15.5 percentage points. Unfortunately LXP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); LXP investors were disappointed as the stock returned 7.3% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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