Do Hedge Funds Love Western Asset Mortgage Capital Corp (WMC)?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Western Asset Mortgage Capital Corp (NYSE:WMC) was in 6 hedge funds’ portfolios at the end of the third quarter of 2016. WMC has experienced an increase in support from the world’s most successful money managers of late. There were 4 hedge funds in our database with WMC holdings at the end of the previous quarter. At the end of this article we will also compare WMC to other stocks including Monarch Casino & Resort, Inc. (NASDAQ:MCRI), NewLink Genetics Corp (NASDAQ:NLNK), and Winmark Corporation (NASDAQ:WINA) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

Now, we’re going to review the recent action surrounding Western Asset Mortgage Capital Corp (NYSE:WMC).

What have hedge funds been doing with Western Asset Mortgage Capital Corp (NYSE:WMC)?

Heading into the fourth quarter of 2016, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, up by 50% from one quarter earlier. By comparison, 2 hedge funds held shares or bullish call options in WMC heading into this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Jim Simons’ Renaissance Technologies, one of the largest hedge funds in the world, has the biggest position in Western Asset Mortgage Capital Corp (NYSE:WMC), worth close to $4 million. The second most bullish fund manager is Ken Griffin of Citadel Investment Group, with a $1.7 million position. Other members of the smart money that are bullish consist of Mike Vranos’ Ellington, John Overdeck and David Siegel’s Two Sigma Advisors and Matthew Hulsizer’s PEAK6 Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As aggregate interest increased, key hedge funds were leading the bulls’ herd. Ellington assembled the most valuable position in Western Asset Mortgage Capital Corp (NYSE:WMC). Ellington had $0.2 million invested in the company at the end of the quarter. Two Sigma Advisors also made a $0.1 million investment in the stock during the quarter. The only other fund with a new position in the stock is  PEAK6 Capital Management.

Let’s now review hedge fund activity in other stocks similar to Western Asset Mortgage Capital Corp (NYSE:WMC). We will take a look at Monarch Casino & Resort, Inc. (NASDAQ:MCRI), NewLink Genetics Corp (NASDAQ:NLNK), Winmark Corporation (NASDAQ:WINA), and La Jolla Pharmaceutical Company (NASDAQ:LJPC). This group of stocks’ market caps are similar to WMC’s market cap.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $6 million in WMC’s case. NewLink Genetics Corp (NASDAQ:NLNK) is the most popular stock in this table. On the other hand Winmark Corporation (NASDAQ:WINA) is the least popular one with only 3 bullish hedge fund positions. Western Asset Mortgage Capital Corp (NYSE:WMC) 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. In this regard NLNK might be a better candidate to consider taking a long position in.

Disclosure: None