“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Two Harbors Investment Corp (NYSE:TWO) and see how it was affected.
Is Two Harbors Investment Corp (NYSE:TWO) an outstanding investment today? Hedge funds are becoming more confident. The number of long hedge fund bets rose by 2 lately. Our calculations also showed that two isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to take a glance at the new hedge fund action encompassing Two Harbors Investment Corp (NYSE:TWO).
What have hedge funds been doing with Two Harbors Investment Corp (NYSE:TWO)?
Heading into the second quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in TWO over the last 15 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Israel Englander’s Millennium Management has the largest position in Two Harbors Investment Corp (NYSE:TWO), worth close to $24.3 million, comprising less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Element Capital Management, led by Jeffrey Talpins, holding a $20.3 million position; 0.6% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors with similar optimism consist of Jim Simons’s Renaissance Technologies, Phill Gross and Robert Atchinson’s Adage Capital Management and David Rodriguez-Fraile’s BlueMar Capital Management.
As industrywide interest jumped, some big names have jumped into Two Harbors Investment Corp (NYSE:TWO) headfirst. Element Capital Management, managed by Jeffrey Talpins, assembled the largest position in Two Harbors Investment Corp (NYSE:TWO). Element Capital Management had $20.3 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also made a $10.1 million investment in the stock during the quarter. The following funds were also among the new TWO investors: David Rodriguez-Fraile’s BlueMar Capital Management, Mike Vranos’s Ellington, and Paul Marshall and Ian Wace’s Marshall Wace LLP.
Let’s now review hedge fund activity in other stocks similar to Two Harbors Investment Corp (NYSE:TWO). These stocks are Immunomedics, Inc. (NASDAQ:IMMU), Tandem Diabetes Care Inc (NASDAQ:TNDM), MasTec, Inc. (NYSE:MTZ), and VEON Ltd. (NASDAQ:VEON). This group of stocks’ market valuations resemble TWO’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IMMU | 24 | 801981 | -4 |
| TNDM | 33 | 492339 | 8 |
| MTZ | 28 | 874933 | -1 |
| VEON | 15 | 71783 | 6 |
| Average | 25 | 560259 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $560 million. That figure was $102 million in TWO’s case. Tandem Diabetes Care Inc (NASDAQ:TNDM) is the most popular stock in this table. On the other hand VEON Ltd. (NASDAQ:VEON) is the least popular one with only 15 bullish hedge fund positions. Two Harbors Investment Corp (NYSE:TWO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately TWO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TWO investors were disappointed as the stock returned -8.4% 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 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.
