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Did Hedge Funds Make The Right Call On Apollo Commercial Real Est. Finance Inc (ARI) ?

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 Apollo Commercial Real Est. Finance Inc (NYSE:ARI) and determine whether hedge funds had an edge regarding this stock.

Is Apollo Commercial Real Est. Finance Inc (NYSE:ARI) a buy, sell, or hold? The smart money was getting more optimistic. The number of bullish hedge fund bets moved up by 1 recently. Our calculations also showed that ARI 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.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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 recent hedge fund action surrounding Apollo Commercial Real Est. Finance Inc (NYSE:ARI).

What have hedge funds been doing with Apollo Commercial Real Est. Finance Inc (NYSE:ARI)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ARI over the last 18 quarters. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Among these funds, Millennium Management held the most valuable stake in Apollo Commercial Real Est. Finance Inc (NYSE:ARI), which was worth $14.6 million at the end of the third quarter. On the second spot was Winton Capital Management which amassed $9.6 million worth of shares. D E Shaw, Renaissance Technologies, and Weld Capital Management 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 Weld Capital Management allocated the biggest weight to Apollo Commercial Real Est. Finance Inc (NYSE:ARI), around 0.91% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, earmarking 0.3 percent of its 13F equity portfolio to ARI.

As aggregate interest increased, some big names have been driving this bullishness. Weld Capital Management, managed by Minhua Zhang, established the most outsized position in Apollo Commercial Real Est. Finance Inc (NYSE:ARI). Weld Capital Management had $1.8 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $0.5 million investment in the stock during the quarter. The other funds with brand new ARI positions are Greg Eisner’s Engineers Gate Manager, Donald Sussman’s Paloma Partners, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Apollo Commercial Real Est. Finance Inc (NYSE:ARI) but similarly valued. We will take a look at WW International, Inc. (NASDAQ:WW), Beacon Roofing Supply, Inc. (NASDAQ:BECN), LGI Homes Inc (NASDAQ:LGIH), and Allscripts Healthcare Solutions Inc (NASDAQ:MDRX). All of these stocks’ market caps are closest to ARI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WW 22 175765 -15
BECN 20 164410 -2
LGIH 14 53155 1
MDRX 17 126905 -14
Average 18.25 130059 -7.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $41 million in ARI’s case. WW International, Inc. (NASDAQ:WW) is the most popular stock in this table. On the other hand LGI Homes Inc (NASDAQ:LGIH) is the least popular one with only 14 bullish hedge fund positions. Apollo Commercial Real Est. Finance Inc (NYSE:ARI) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on ARI, though not to the same extent, as the stock returned 26.6% since Q1 and outperformed the market.

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