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Hedge Funds Never Been Less Bullish On Exantas Capital Corp. (XAN)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Exantas Capital Corp. (NYSE:XAN) and determine whether hedge funds had an edge regarding this stock.

Exantas Capital Corp. (NYSE:XAN) investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that XAN 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 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.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a gander at the fresh hedge fund action surrounding Exantas Capital Corp. (NYSE:XAN).

Hedge fund activity in Exantas Capital Corp. (NYSE:XAN)

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in XAN over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Is XAN A Good Stock To Buy?

Among these funds, HBK Investments held the most valuable stake in Exantas Capital Corp. (NYSE:XAN), which was worth $4.3 million at the end of the third quarter. On the second spot was Millennium Management which amassed $2.2 million worth of shares. Forward Management, Renaissance Technologies, and D E Shaw 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 Forward Management allocated the biggest weight to Exantas Capital Corp. (NYSE:XAN), around 0.44% of its 13F portfolio. HBK Investments is also relatively very bullish on the stock, earmarking 0.13 percent of its 13F equity portfolio to XAN.

Judging by the fact that Exantas Capital Corp. (NYSE:XAN) has witnessed bearish sentiment from hedge fund managers, logic holds that there was a specific group of fund managers that decided to sell off their entire stakes last quarter. Intriguingly, Derek C. Schrier’s Indaba Capital Management sold off the biggest investment of all the hedgies monitored by Insider Monkey, worth about $13.2 million in stock, and Ron Mass’s Almitas Capital was right behind this move, as the fund cut about $2.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 5 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Exantas Capital Corp. (NYSE:XAN). We will take a look at Marker Therapeutics, Inc. (NASDAQ:MRKR), Chimerix Inc (NASDAQ:CMRX), ContraFect Corp (NASDAQ:CFRX), and Fluent, Inc. (NASDAQ:FLNT). This group of stocks’ market values match XAN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRKR 5 3475 -1
CMRX 11 13139 2
CFRX 5 4605 -2
FLNT 7 996 -1
Average 7 5554 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 7 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $14 million in XAN’s case. Chimerix Inc (NASDAQ:CMRX) is the most popular stock in this table. On the other hand Marker Therapeutics, Inc. (NASDAQ:MRKR) is the least popular one with only 5 bullish hedge fund positions. Exantas Capital Corp. (NYSE:XAN) 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 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 beat the market by 15.5 percentage points. Unfortunately XAN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on XAN were disappointed as the stock returned -4% during the same time 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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