Did Hedge Funds Make The Right Call On Redfin Corporation (RDFN) ?

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 Redfin Corporation (NASDAQ:RDFN) and determine whether hedge funds had an edge regarding this stock.

Redfin Corporation (NASDAQ:RDFN) investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. RDFN was in 20 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with RDFN holdings at the end of the previous quarter. Our calculations also showed that RDFN 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Driehaus of Driehaus Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this under-the-radar lithium 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. Keeping this in mind we’re going to go over the recent hedge fund action surrounding Redfin Corporation (NASDAQ:RDFN).

How are hedge funds trading Redfin Corporation (NASDAQ:RDFN)?

Heading into the second quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RDFN over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Is RDFN A Good Stock To Buy?

Among these funds, Ancient Art (Teton Capital) held the most valuable stake in Redfin Corporation (NASDAQ:RDFN), which was worth $45.8 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $17.1 million worth of shares. Atreides Management, Point72 Asset Management, and Citadel Investment Group 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 Ancient Art (Teton Capital) allocated the biggest weight to Redfin Corporation (NASDAQ:RDFN), around 7.39% of its 13F portfolio. Atreides Management is also relatively very bullish on the stock, dishing out 3.64 percent of its 13F equity portfolio to RDFN.

Consequently, key money managers were leading the bulls’ herd. Driehaus Capital, managed by Richard Driehaus, assembled the largest position in Redfin Corporation (NASDAQ:RDFN). Driehaus Capital had $2.4 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $1.5 million investment in the stock during the quarter. The following funds were also among the new RDFN investors: Principal Global Investors’s Columbus Circle Investors, John Overdeck and David Siegel’s Two Sigma Advisors, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Redfin Corporation (NASDAQ:RDFN) but similarly valued. We will take a look at Progress Software Corporation (NASDAQ:PRGS), STAAR Surgical Company (NASDAQ:STAA), Primo Water Corporation (NYSE:PRMW), and Pebblebrook Hotel Trust (NYSE:PEB). This group of stocks’ market valuations resemble RDFN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PRGS 22 197676 2
STAA 21 519115 -2
PRMW 36 463146 23
PEB 10 224467 -12
Average 22.25 351101 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $351 million. That figure was $107 million in RDFN’s case. Primo Water Corporation (NYSE:PRMW) is the most popular stock in this table. On the other hand Pebblebrook Hotel Trust (NYSE:PEB) is the least popular one with only 10 bullish hedge fund positions. Redfin Corporation (NASDAQ:RDFN) 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 and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on RDFN as the stock returned 182% since the end of March and outperformed the market by an even larger margin.

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