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Did Hedge Funds Drop The Ball On QTS Realty Trust Inc (QTS) ?

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 QTS Realty Trust Inc (NYSE:QTS) and determine whether hedge funds had an edge regarding this stock.

QTS Realty Trust Inc (NYSE:QTS) was in 21 hedge funds’ portfolios at the end of the first quarter of 2020. QTS investors should pay attention to a decrease in enthusiasm from smart money of late. There were 23 hedge funds in our database with QTS holdings at the end of the previous quarter. Our calculations also showed that QTS 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.

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 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 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.

Stuart Zimmer Zimmer Partners

Stuart Zimmer of Zimmer Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to view the latest hedge fund action encompassing QTS Realty Trust Inc (NYSE:QTS).

How have hedgies been trading QTS Realty Trust Inc (NYSE:QTS)?

Heading into the second quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from one quarter earlier. By comparison, 22 hedge funds held shares or bullish call options in QTS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Zimmer Partners, managed by Stuart J. Zimmer, holds the most valuable position in QTS Realty Trust Inc (NYSE:QTS). Zimmer Partners has a $111.2 million position in the stock, comprising 2.5% of its 13F portfolio. Coming in second is V3 Capital, managed by Charles Fitzgerald, which holds a $63.1 million position; 13.8% of its 13F portfolio is allocated to the company. Other peers with similar optimism include Sander Gerber’s Hudson Bay Capital Management, Jonathan Litt’s Land & Buildings Investment Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position V3 Capital allocated the biggest weight to QTS Realty Trust Inc (NYSE:QTS), around 13.8% of its 13F portfolio. Land & Buildings Investment Management is also relatively very bullish on the stock, dishing out 13.1 percent of its 13F equity portfolio to QTS.

Due to the fact that QTS Realty Trust Inc (NYSE:QTS) has faced bearish sentiment from hedge fund managers, it’s easy to see that there is a sect of hedge funds who were dropping their full holdings heading into Q4. Intriguingly, Jeffrey Hinkle’s Shoals Capital Management dumped the biggest position of the 750 funds monitored by Insider Monkey, totaling close to $6.5 million in stock, and Alec Litowitz and Ross Laser’s Magnetar Capital was right behind this move, as the fund sold off about $5.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 2 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to QTS Realty Trust Inc (NYSE:QTS). We will take a look at Stag Industrial Inc (NYSE:STAG), Grupo Televisa SAB (NYSE:TV), Mirati Therapeutics, Inc. (NASDAQ:MRTX), and Cabot Microelectronics Corporation (NASDAQ:CCMP). This group of stocks’ market valuations resemble QTS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STAG 15 79203 -3
TV 19 481852 0
MRTX 33 1122981 1
CCMP 16 232320 -8
Average 20.75 479089 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $479 million. That figure was $366 million in QTS’s case. Mirati Therapeutics, Inc. (NASDAQ:MRTX) is the most popular stock in this table. On the other hand Stag Industrial Inc (NYSE:STAG) is the least popular one with only 15 bullish hedge fund positions. QTS Realty Trust Inc (NYSE:QTS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately QTS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on QTS were disappointed as the stock returned 20.4% during the same time period 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 many of these stocks already outperformed the market so far this year.

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