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Did Hedge Funds Make The Right Call On Service Properties Trust (SVC) ?

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 Service Properties Trust (NASDAQ:SVC) and determine whether hedge funds skillfully traded this stock.

Is Service Properties Trust (NASDAQ:SVC) a bargain? The smart money was getting more bullish. The number of long hedge fund positions inched up by 6 recently. Our calculations also showed that SVC 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). SVC was in 23 hedge funds’ portfolios at the end of March. There were 17 hedge funds in our database with SVC holdings at the end of the previous quarter.

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.

TUDOR INVESTMENT CORP

Paul Tudor Jones of Tudor Investment Corp

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. Keeping this in mind let’s analyze the key hedge fund action regarding Service Properties Trust (NASDAQ:SVC).

How are hedge funds trading Service Properties Trust (NASDAQ:SVC)?

At Q1’s end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 35% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SVC over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Service Properties Trust (NASDAQ:SVC) was held by Pzena Investment Management, which reported holding $7.4 million worth of stock at the end of September. It was followed by Balyasny Asset Management with a $6.6 million position. Other investors bullish on the company included Renaissance Technologies, Citadel Investment Group, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Hourglass Capital allocated the biggest weight to Service Properties Trust (NASDAQ:SVC), around 0.62% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, dishing out 0.09 percent of its 13F equity portfolio to SVC.

Now, some big names were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the biggest position in Service Properties Trust (NASDAQ:SVC). Arrowstreet Capital had $2.2 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 new positions in the stock are Greg Eisner’s Engineers Gate Manager, Donald Sussman’s Paloma Partners, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Service Properties Trust (NASDAQ:SVC). These stocks are Odonate Therapeutics, Inc. (NASDAQ:ODT), Immunovant, Inc. (NASDAQ:IMVT), Spirit Airlines Incorporated (NYSE:SAVE), and Black Diamond Therapeutics, Inc. (NASDAQ:BDTX). This group of stocks’ market caps match SVC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ODT 13 471188 -2
IMVT 28 146496 6
SAVE 28 86042 -9
BDTX 13 162606 13
Average 20.5 216583 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $217 million. That figure was $31 million in SVC’s case. Immunovant, Inc. (NASDAQ:IMVT) is the most popular stock in this table. On the other hand Odonate Therapeutics, Inc. (NASDAQ:ODT) is the least popular one with only 13 bullish hedge fund positions. Service Properties Trust (NASDAQ:SVC) 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 SVC as the stock returned 31.5% 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.