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Did Hedge Funds Make The Right Call On Meritage Homes Corp (MTH)?

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 Meritage Homes Corp (NYSE:MTH) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Meritage Homes Corp (NYSE:MTH) was in 22 hedge funds’ portfolios at the end of the first quarter of 2020. MTH has seen a decrease in enthusiasm from smart money lately. There were 29 hedge funds in our database with MTH positions at the end of the previous quarter. Our calculations also showed that MTH 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Ken Heebner of Capital Growth Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let’s view the key hedge fund action regarding Meritage Homes Corp (NYSE:MTH).

How are hedge funds trading Meritage Homes Corp (NYSE:MTH)?

At the end of the first quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards MTH over the last 18 quarters. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Ken Fisher’s Fisher Asset Management has the number one position in Meritage Homes Corp (NYSE:MTH), worth close to $43.4 million, amounting to 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Capital Growth Management, managed by Ken Heebner, which holds a $33.4 million position; 4.7% of its 13F portfolio is allocated to the company. Remaining members of the smart money that hold long positions contain Israel Englander’s Millennium Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Capital Growth Management allocated the biggest weight to Meritage Homes Corp (NYSE:MTH), around 4.69% of its 13F portfolio. TwinBeech Capital is also relatively very bullish on the stock, designating 0.26 percent of its 13F equity portfolio to MTH.

Seeing as Meritage Homes Corp (NYSE:MTH) has faced declining sentiment from hedge fund managers, it’s safe to say that there were a few hedge funds that decided to sell off their positions entirely heading into Q4. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP said goodbye to the biggest stake of the 750 funds watched by Insider Monkey, totaling close to $2.6 million in stock, and Paul Tudor Jones’s Tudor Investment Corp was right behind this move, as the fund cut about $2.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 7 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Meritage Homes Corp (NYSE:MTH) but similarly valued. These stocks are Hilltop Holdings Inc. (NYSE:HTH), SailPoint Technologies Holdings, Inc. (NYSE:SAIL), CSG Systems International, Inc. (NASDAQ:CSGS), and InterDigital, Inc. (NASDAQ:IDCC). All of these stocks’ market caps are similar to MTH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HTH 15 58772 -4
SAIL 21 204302 -4
CSGS 19 170275 -4
IDCC 23 289642 -4
Average 19.5 180748 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $181 million. That figure was $155 million in MTH’s case. InterDigital, Inc. (NASDAQ:IDCC) is the most popular stock in this table. On the other hand Hilltop Holdings Inc. (NYSE:HTH) is the least popular one with only 15 bullish hedge fund positions. Meritage Homes Corp (NYSE:MTH) is not the most popular stock in this group but hedge fund interest is still above 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on MTH as the stock returned 108.5% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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