Hedge Funds Are Dumping Ellington Residential Mortgage REIT (EARN)

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the third quarter we observed increased volatility and small-cap stocks underperformed the market. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Ellington Residential Mortgage REIT (NYSE:EARN) to find out whether it was one of their high conviction long-term ideas.

Ellington Residential Mortgage REIT (NYSE:EARN) has experienced a decrease in enthusiasm from smart money recently. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Protalix BioTherapeutics Inc. (NYSEAMEX:PLX), Recro Pharma Inc (NASDAQ:REPH), and American Capital Senior Floating Ltd (NASDAQ:ACSF) to gather more data points.

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According to most investors, hedge funds are seen as unimportant, outdated investment vehicles of the years past. While there are greater than 8000 funds in operation today, Our researchers choose to focus on the upper echelon of this group, approximately 700 funds. These investment experts oversee the majority of the hedge fund industry’s total capital, and by keeping an eye on their inimitable investments, Insider Monkey has figured out several investment strategies that have historically outpaced the broader indices. Insider Monkey’s small-cap hedge fund strategy outrun the S&P 500 index by 12 percentage points a year for a decade in their back tests.

Keeping this in mind, let’s take a glance at the key action regarding Ellington Residential Mortgage REIT (NYSE:EARN).

What does the smart money think about Ellington Residential Mortgage REIT (NYSE:EARN)?

Heading into Q4, a total of 4 of the hedge funds tracked by Insider Monkey were long this stock, a drop of 20% from one quarter earlier. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Renaissance Technologies holds the number one position in Ellington Residential Mortgage REIT (NYSE:EARN). Renaissance Technologies has a $4.1 million position in the stock, comprising less than 0.1% of its 13F portfolio. Sitting at the No. 2 spot is Two Sigma Advisors, led by John Overdeck and David Siegel, holding a $0.6 million position; the fund has less than 0.1% of its 13F portfolio invested in the stock. Hedge funds and other institutional investors with similar optimism encompass Israel Englander’s Millennium Management, and D E Shaw.

We view hedge fund selling in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Nine Chapters Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified Ellington Residential Mortgage REIT (NYSE:EARN) as a viable investment and initiated a position in the stock.

Let’s go over the hedge fund activity in other stocks similar to Ellington Residential Mortgage REIT (NYSE:EARN). We will take a look at Protalix BioTherapeutics Inc. (NYSEAMEX:PLX), Recro Pharma Inc (NASDAQ:REPH), American Capital Senior Floating Ltd (NASDAQ:ACSF), and Community Financial Corp (NASDAQ:TCFC). All of these stocks’ market caps resemble Ellington Residential Mortgage REIT (NYSE:EARN)’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PLX 5 17251 -2
REPH 7 42589 4
ACSF 4 5219 0
TCFC 4 19155 0

As you can see, these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. Recro Pharma Inc (NASDAQ:REPH) is the most popular stock in this table, while American Capital Senior Floating Ltd (NASDAQ:ACSF) is the least popular one. Compared to these stocks, Ellington Residential Mortgage REIT (NYSE:EARN) is even less popular than American Capital Senior Floating Ltd (NASDAQ:ACSF), bagging only $6 million of the investors’ money. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.