Did Hedge Funds Make The Right Call On Green Brick Partners Inc (GRBK) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Green Brick Partners Inc (NASDAQ:GRBK) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Green Brick Partners Inc (NASDAQ:GRBK) a buy here? Investors who are in the know were betting on the stock. The number of long hedge fund bets increased by 2 recently. Our calculations also showed that GRBK 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.

Greenlight Capital

David Einhorn of Greenlight Capital

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. Now let’s analyze the key hedge fund action surrounding Green Brick Partners Inc (NASDAQ:GRBK).

How have hedgies been trading Green Brick Partners Inc (NASDAQ:GRBK)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards GRBK over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Greenlight Capital held the most valuable stake in Green Brick Partners Inc (NASDAQ:GRBK), which was worth $194.2 million at the end of the third quarter. On the second spot was Stadium Capital Management which amassed $10 million worth of shares. Diamond Hill Capital, Birch Run Capital, and Ariel Investments 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 Greenlight Capital allocated the biggest weight to Green Brick Partners Inc (NASDAQ:GRBK), around 27.66% of its 13F portfolio. AWH Capital is also relatively very bullish on the stock, earmarking 15.16 percent of its 13F equity portfolio to GRBK.

As one would reasonably expect, some big names were leading the bulls’ herd. AQR Capital Management, managed by Cliff Asness, assembled the most valuable position in Green Brick Partners Inc (NASDAQ:GRBK). AQR Capital Management had $0.5 million invested in the company at the end of the quarter. Peter Muller’s PDT Partners also initiated a $0.1 million position during the quarter. The following funds were also among the new GRBK investors: Greg Eisner’s Engineers Gate Manager and Thomas Bailard’s Bailard Inc.

Let’s also examine hedge fund activity in other stocks similar to Green Brick Partners Inc (NASDAQ:GRBK). We will take a look at Cadiz Inc (NASDAQ:CDZI), Capstead Mortgage Corporation (NYSE:CMO), Sabine Royalty Trust (NYSE:SBR), and nLIGHT, Inc. (NASDAQ:LASR). All of these stocks’ market caps match GRBK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CDZI 8 13652 -3
CMO 12 47986 0
SBR 4 13210 -2
LASR 7 23474 1
Average 7.75 24581 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 7.75 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $228 million in GRBK’s case. Capstead Mortgage Corporation (NYSE:CMO) is the most popular stock in this table. On the other hand Sabine Royalty Trust (NYSE:SBR) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Green Brick Partners Inc (NASDAQ:GRBK) is more popular among hedge funds. 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on GRBK as the stock returned 77.4% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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