Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is Meritage Homes Corp (NYSE:MTH) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.
Meritage Homes Corp (NYSE:MTH) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 29 hedge funds’ portfolios at the end of the fourth quarter of 2019. At the end of this article we will also compare MTH to other stocks including Altra Industrial Motion Corp. (NASDAQ:AIMC), Holly Energy Partners, L.P. (NYSE:HEP), and Urban Edge Properties (NYSE:UE) to get a better sense of its popularity.
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 41 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.
Ken Heebner of Capital Growth Management
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the fresh hedge fund action regarding Meritage Homes Corp (NYSE:MTH).
How are hedge funds trading Meritage Homes Corp (NYSE:MTH)?
At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 13 hedge funds with a bullish position in MTH a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Ken Fisher’s Fisher Asset Management has the biggest position in Meritage Homes Corp (NYSE:MTH), worth close to $78.9 million, comprising 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is GLG Partners, managed by Noam Gottesman, which holds a $39.3 million position; 0.1% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish comprise Renaissance Technologies, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Ken Heebner’s Capital Growth Management. In terms of the portfolio weights assigned to each position Capital Growth Management allocated the biggest weight to Meritage Homes Corp (NYSE:MTH), around 1.63% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, dishing out 0.37 percent of its 13F equity portfolio to MTH.
Judging by the fact that Meritage Homes Corp (NYSE:MTH) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of funds who were dropping their entire stakes by the end of the third quarter. Interestingly, Steven Richman’s East Side Capital (RR Partners) dropped the largest investment of all the hedgies tracked by Insider Monkey, comprising close to $63.6 million in stock, and Robert Bishop’s Impala Asset Management was right behind this move, as the fund cut about $15.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks similar to Meritage Homes Corp (NYSE:MTH). We will take a look at Altra Industrial Motion Corp. (NASDAQ:AIMC), Holly Energy Partners, L.P. (NYSE:HEP), Urban Edge Properties (NYSE:UE), and Worthington Industries, Inc. (NYSE:WOR). This group of stocks’ market values are closest to MTH’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AIMC | 15 | 202883 | 0 |
| HEP | 5 | 21261 | -1 |
| UE | 19 | 86028 | 6 |
| WOR | 25 | 61206 | 1 |
| Average | 16 | 92845 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $93 million. That figure was $250 million in MTH’s case. Worthington Industries, Inc. (NYSE:WOR) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Meritage Homes Corp (NYSE:MTH) 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. These stocks lost 13.0% in 2020 through April 6th and still beat the market by 4.2 percentage points. Unfortunately MTH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MTH were disappointed as the stock returned -36.7% during the three months of 2020 (through April 6th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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.
