Were These Hedge Funds Wrong About Betting On Equity Residential (EQR)?

In this article you are going to find out whether hedge funds think Equity Residential (NYSE:EQR) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Equity Residential (NYSE:EQR) a buy here? Money managers were in an optimistic mood. The number of bullish hedge fund positions inched up by 9 in recent months. Equity Residential (NYSE:EQR) was in 33 hedge funds’ portfolios at the end of June. The all time high for this statistics is 30. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that EQR isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.

Paul Tudor Jones of Tudor Investment Corp

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a peek at the recent hedge fund action surrounding Equity Residential (NYSE:EQR).

Hedge fund activity in Equity Residential (NYSE:EQR)

At the end of the second quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in EQR over the last 20 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, D E Shaw, managed by D. E. Shaw, holds the number one position in Equity Residential (NYSE:EQR). D E Shaw has a $85 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is Renaissance Technologies, with a $82.5 million position; 0.1% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that are bullish comprise John Khoury’s Long Pond Capital, Ken Griffin’s Citadel Investment Group and Dmitry Balyasny’s Balyasny Asset Management. In terms of the portfolio weights assigned to each position Long Pond Capital allocated the biggest weight to Equity Residential (NYSE:EQR), around 2.81% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, setting aside 2.3 percent of its 13F equity portfolio to EQR.

Now, key money managers have been driving this bullishness. Long Pond Capital, managed by John Khoury, initiated the biggest position in Equity Residential (NYSE:EQR). Long Pond Capital had $71.2 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $44.2 million position during the quarter. The other funds with new positions in the stock are Greg Poole’s Echo Street Capital Management, Eduardo Abush’s Waterfront Capital Partners, and Paul Tudor Jones’s Tudor Investment Corp.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Equity Residential (NYSE:EQR) but similarly valued. We will take a look at AvalonBay Communities Inc (NYSE:AVB), Tyson Foods, Inc. (NYSE:TSN), PT Telekomunikasi Indonesia (NYSE:TLK), CrowdStrike Holdings, Inc. (NASDAQ:CRWD), Align Technology, Inc. (NASDAQ:ALGN), Welltower Inc. (NYSE:WELL), and Sun Life Financial Inc. (NYSE:SLF). This group of stocks’ market caps are similar to EQR’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.6 hedge funds with bullish positions and the average amount invested in these stocks was $1154 million. That figure was $555 million in EQR’s case. CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is the most popular stock in this table. On the other hand PT Telekomunikasi Indonesia (NYSE:TLK) is the least popular one with only 4 bullish hedge fund positions. Equity Residential (NYSE:EQR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for EQR is 59.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately EQR wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); EQR investors were disappointed as the stock returned -19.2% since the end of June (through 10/30) 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.

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