Is Colony Credit Real Estate, Inc. (CLNC) A Good Stock To Buy?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Colony Credit Real Estate, Inc. (NYSE:CLNC) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Colony Credit Real Estate, Inc. (NYSE:CLNC) was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. CLNC has experienced a decrease in support from the world’s most elite money managers lately. There were 8 hedge funds in our database with CLNC positions at the end of the previous quarter. Our calculations also showed that CLNC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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’ 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ken Griffin

Ken Griffin of Citadel Investment Group

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to view the latest hedge fund action encompassing Colony Credit Real Estate, Inc. (NYSE:CLNC).

How have hedgies been trading Colony Credit Real Estate, Inc. (NYSE:CLNC)?

Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 4 hedge funds with a bullish position in CLNC a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CLNC A Good Stock To Buy?

More specifically, HBK Investments was the largest shareholder of Colony Credit Real Estate, Inc. (NYSE:CLNC), with a stake worth $11.9 million reported as of the end of September. Trailing HBK Investments was Citadel Investment Group, which amassed a stake valued at $0.6 million. Tudor Investment Corp, AQR Capital Management, and Point72 Asset Management 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 HBK Investments allocated the biggest weight to Colony Credit Real Estate, Inc. (NYSE:CLNC), around 0.23% of its 13F portfolio. Tudor Investment Corp is also relatively very bullish on the stock, earmarking 0.01 percent of its 13F equity portfolio to CLNC.

Seeing as Colony Credit Real Estate, Inc. (NYSE:CLNC) has experienced falling interest from hedge fund managers, we can see that there were a few money managers that decided to sell off their entire stakes heading into Q4. Interestingly, Andrew Weiss’s Weiss Asset Management cut the biggest investment of all the hedgies tracked by Insider Monkey, comprising about $2.8 million in stock,  Renaissance Technologies was right behind this move, as the fund said goodbye to about $2 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Colony Credit Real Estate, Inc. (NYSE:CLNC). We will take a look at Minerals Technologies Inc (NYSE:MTX), The Cheesecake Factory Incorporated (NASDAQ:CAKE), Grupo Financiero Galicia S.A. (NASDAQ:GGAL), and Pacific Premier Bancorp, Inc. (NASDAQ:PPBI). All of these stocks’ market caps are closest to CLNC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MTX 17 107111 2
CAKE 22 116362 -3
GGAL 8 25672 -4
PPBI 8 45631 0
Average 13.75 73694 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $74 million. That figure was $14 million in CLNC’s case. The Cheesecake Factory Incorporated (NASDAQ:CAKE) is the most popular stock in this table. On the other hand Grupo Financiero Galicia S.A. (NASDAQ:GGAL) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Colony Credit Real Estate, Inc. (NYSE:CLNC) is even less popular than GGAL. Hedge funds dodged a bullet by taking a bearish stance towards CLNC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CLNC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CLNC investors were disappointed as the stock returned -6% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.

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