Hedge Fund Consensus Stocks vs. William Lyon Homes (WLH) In 2019

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about William Lyon Homes (NYSE:WLH)?

William Lyon Homes (NYSE:WLH) has seen an increase in hedge fund interest in recent months. Our calculations also showed that WLH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s go over the key hedge fund action encompassing William Lyon Homes (NYSE:WLH).

What have hedge funds been doing with William Lyon Homes (NYSE:WLH)?

At the end of the third quarter, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WLH over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Among these funds, Long Pond Capital held the most valuable stake in William Lyon Homes (NYSE:WLH), which was worth $64.9 million at the end of the third quarter. On the second spot was Miller Value Partners which amassed $16.5 million worth of shares. Basswood Capital, Royce & Associates, and Shoals Capital Management 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 Shoals Capital Management allocated the biggest weight to William Lyon Homes (NYSE:WLH), around 11.9% of its 13F portfolio. Gratia Capital is also relatively very bullish on the stock, dishing out 3.65 percent of its 13F equity portfolio to WLH.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into William Lyon Homes (NYSE:WLH) headfirst. Shoals Capital Management, managed by Jeffrey Hinkle, established the most outsized position in William Lyon Homes (NYSE:WLH). Shoals Capital Management had $8.7 million invested in the company at the end of the quarter. Louis Bacon’s Moore Global Investments also made a $3.6 million investment in the stock during the quarter. The following funds were also among the new WLH investors: Emanuel J. Friedman’s EJF Capital, Ken Griffin’s Citadel Investment Group, and Donald Sussman’s Paloma Partners.

Let’s also examine hedge fund activity in other stocks similar to William Lyon Homes (NYSE:WLH). We will take a look at PetIQ, Inc. (NASDAQ:PETQ), Axonics Modulation Technologies, Inc. (NASDAQ:AXNX), Virtus Investment Partners Inc (NASDAQ:VRTS), and Forestar Group Inc. (NYSE:FOR). This group of stocks’ market caps are similar to WLH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PETQ 16 96449 3
AXNX 11 93838 -1
VRTS 16 94591 -1
FOR 15 99738 11
Average 14.5 96154 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $96 million. That figure was $164 million in WLH’s case. PetIQ, Inc. (NASDAQ:PETQ) is the most popular stock in this table. On the other hand Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks William Lyon Homes (NYSE:WLH) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on WLH as the stock returned 86.9% in 2019 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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