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Hedge Funds Have Never Been This Bullish On Redwood Trust, Inc. (RWT)

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first quarter, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first quarter still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Redwood Trust, Inc. (NYSE:RWT) changed recently.

Redwood Trust, Inc. (NYSE:RWT) investors should pay attention to an increase in hedge fund sentiment of late. Our calculations also showed that RWT isn’t among the 30 most popular stocks among hedge funds.

To most shareholders, hedge funds are seen as unimportant, old financial tools of yesteryear. While there are more than 8000 funds in operation at the moment, Our researchers look at the top tier of this club, around 750 funds. These money managers direct bulk of all hedge funds’ total asset base, and by tailing their finest stock picks, Insider Monkey has come up with a few investment strategies that have historically defeated the market. Insider Monkey’s flagship hedge fund strategy outrun the S&P 500 index by around 5 percentage points a year since its inception in May 2014 through June 18th. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 28.2% since February 2017 (through June 18th) even though the market was up nearly 30% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 8.2% in a month whereas our long picks outperformed the market by 2.5 percentage points in this volatile 5 week period (our long picks also beat the market by 15 percentage points so far this year).

Dmitry Balyasny

We’re going to take a gander at the fresh hedge fund action regarding Redwood Trust, Inc. (NYSE:RWT).

What does smart money think about Redwood Trust, Inc. (NYSE:RWT)?

At the end of the first quarter, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from one quarter earlier. By comparison, 8 hedge funds held shares or bullish call options in RWT 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.

RWT_jun2019

More specifically, Wallace R. Weitz & Co. was the largest shareholder of Redwood Trust, Inc. (NYSE:RWT), with a stake worth $55.8 million reported as of the end of March. Trailing Wallace R. Weitz & Co. was Shoals Capital Management, which amassed a stake valued at $15.3 million. Renaissance Technologies, Balyasny Asset Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, created the largest position in Redwood Trust, Inc. (NYSE:RWT). Marshall Wace LLP had $4.3 million invested in the company at the end of the quarter. Mike Vranos’s Ellington also made a $3.8 million investment in the stock during the quarter. The following funds were also among the new RWT investors: Gregg Moskowitz’s Interval Partners, Minhua Zhang’s Weld Capital Management, and David Harding’s Winton Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Redwood Trust, Inc. (NYSE:RWT) but similarly valued. We will take a look at Oceaneering International, Inc. (NYSE:OII), Ferro Corporation (NYSE:FOE), Prestige Consumer Healthcare Inc. (NYSE:PBH), and Matson, Inc. (NYSE:MATX). This group of stocks’ market valuations are closest to RWT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OII 21 127792 5
FOE 16 216138 -3
PBH 13 66863 -2
MATX 9 6472 -3
Average 14.75 104316 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $104 million. That figure was $111 million in RWT’s case. Oceaneering International, Inc. (NYSE:OII) is the most popular stock in this table. On the other hand Matson, Inc. (NYSE:MATX) is the least popular one with only 9 bullish hedge fund positions. Redwood Trust, Inc. (NYSE:RWT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately RWT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on RWT were disappointed as the stock returned 2.5% during the same period 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 13 of these stocks already outperformed the market so far in Q2.

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

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