Did Hedge Funds Drop The Ball On LGI Homes Inc (LGIH) ?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds’ top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like LGI Homes Inc (NASDAQ:LGIH).

LGI Homes Inc (NASDAQ:LGIH) was in 12 hedge funds’ portfolios at the end of the second quarter of 2019. LGIH investors should pay attention to a decrease in hedge fund sentiment recently. There were 14 hedge funds in our database with LGIH positions at the end of the previous quarter. Our calculations also showed that LGIH isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Richard Driehaus

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s review the new hedge fund action encompassing LGI Homes Inc (NASDAQ:LGIH).

What does smart money think about LGI Homes Inc (NASDAQ:LGIH)?

Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the first quarter of 2019. By comparison, 10 hedge funds held shares or bullish call options in LGIH a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

No of Hedge Funds with LGIH Positions

Of the funds tracked by Insider Monkey, Balyasny Asset Management, managed by Dmitry Balyasny, holds the most valuable position in LGI Homes Inc (NASDAQ:LGIH). Balyasny Asset Management has a $26.2 million position in the stock, comprising 0.2% of its 13F portfolio. The second largest stake is held by Chuck Royce of Royce & Associates, with a $23.4 million position; 0.2% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism comprise Douglas Dethy’s DC Capital Partners, Richard Driehaus’s Driehaus Capital and Richard S. Meisenberg’s ACK Asset Management.

Because LGI Homes Inc (NASDAQ:LGIH) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there is a sect of money managers who were dropping their full holdings in the second quarter. Interestingly, Ken Heebner’s Capital Growth Management sold off the largest position of the 750 funds monitored by Insider Monkey, comprising close to $19.3 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund dropped about $4 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 2 funds in the second quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as LGI Homes Inc (NASDAQ:LGIH) but similarly valued. These stocks are Calavo Growers, Inc. (NASDAQ:CVGW), Gray Television, Inc. (NYSE:GTN), SPX FLOW, Inc. (NYSE:FLOW), and GCP Applied Technologies Inc. (NYSE:GCP). This group of stocks’ market values match LGIH’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CVGW 15 46470 3
GTN 25 218715 -2
FLOW 16 180904 -4
GCP 23 457403 -3
Average 19.75 225873 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $226 million. That figure was $127 million in LGIH’s case. Gray Television, Inc. (NYSE:GTN) is the most popular stock in this table. On the other hand Calavo Growers, Inc. (NASDAQ:CVGW) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks LGI Homes Inc (NASDAQ:LGIH) is even less popular than CVGW. Hedge funds clearly dropped the ball on LGIH as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on LGIH as the stock returned 16.6% during the third quarter and outperformed the market by an even larger margin.

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