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Did Hedge Funds Make The Right Call On Realty Income Corporation (O) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Realty Income Corporation (NYSE:O) and determine whether hedge funds skillfully traded this stock.

Realty Income Corporation (NYSE:O) has seen a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that O 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. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Now let’s take a look at the key hedge fund action encompassing Realty Income Corporation (NYSE:O).

Hedge fund activity in Realty Income Corporation (NYSE:O)

Heading into the second quarter of 2020, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards O over the last 18 quarters. 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, Stuart J. Zimmer’s Zimmer Partners has the biggest position in Realty Income Corporation (NYSE:O), worth close to $62.3 million, accounting for 1.4% of its total 13F portfolio. The second most bullish fund manager is Two Sigma Advisors, led by John Overdeck and David Siegel, holding a $33.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other peers that hold long positions contain D. E. Shaw’s D E Shaw, Dmitry Balyasny’s Balyasny Asset Management and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Hill Winds Capital allocated the biggest weight to Realty Income Corporation (NYSE:O), around 8.78% of its 13F portfolio. Pinz Capital is also relatively very bullish on the stock, designating 3.84 percent of its 13F equity portfolio to O.

Seeing as Realty Income Corporation (NYSE:O) has experienced falling interest from the entirety of the hedge funds we track, we can see that there exists a select few hedgies that decided to sell off their entire stakes last quarter. Interestingly, Daniel S. Och’s OZ Management sold off the biggest stake of all the hedgies followed by Insider Monkey, totaling an estimated $3.6 million in stock. Matthew Tewksbury’s fund, Stevens Capital Management, also said goodbye to its stock, about $3.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Realty Income Corporation (NYSE:O) but similarly valued. These stocks are New Oriental Education & Technology Group Inc. (NYSE:EDU), Coca-Cola European Partners plc (NYSE:CCEP), Snap Inc. (NYSE:SNAP), and Tencent Music Entertainment Group (NYSE:TME). This group of stocks’ market caps are closest to O’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EDU 42 1555475 -8
CCEP 22 185913 1
SNAP 48 929814 -18
TME 25 455610 -1
Average 34.25 781703 -6.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $782 million. That figure was $225 million in O’s case. Snap Inc. (NYSE:SNAP) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 22 bullish hedge fund positions. Realty Income Corporation (NYSE:O) 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on O, though not to the same extent, as the stock returned 20.8% during the second quarter and outperformed the market.

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