In this article we will check out the progression of hedge fund sentiment towards MFA Financial, Inc. (NYSE:MFA) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Is MFA a good stock to buy now? MFA Financial, Inc. (NYSE:MFA) shareholders have witnessed an increase in hedge fund interest lately. MFA Financial, Inc. (NYSE:MFA) was in 18 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 19. There were 16 hedge funds in our database with MFA positions at the end of the second quarter. Our calculations also showed that MFA isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 66 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind let’s take a look at the fresh hedge fund action regarding MFA Financial, Inc. (NYSE:MFA).
Do Hedge Funds Think MFA Is A Good Stock To Buy Now?
At the end of September, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in MFA over the last 21 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
The largest stake in MFA Financial, Inc. (NYSE:MFA) was held by Millennium Management, which reported holding $11.5 million worth of stock at the end of September. It was followed by Almitas Capital with a $7.1 million position. Other investors bullish on the company included Almitas Capital, Winton Capital Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Almitas Capital allocated the biggest weight to MFA Financial, Inc. (NYSE:MFA), around 9.62% of its 13F portfolio. Almitas Capital is also relatively very bullish on the stock, earmarking 8.81 percent of its 13F equity portfolio to MFA.
With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Gratia Capital, managed by Steve Pei, initiated the largest position in MFA Financial, Inc. (NYSE:MFA). Gratia Capital had $1.1 million invested in the company at the end of the quarter. Carl Goldsmith and Scott Klein’s Beach Point Capital Management also made a $0.5 million investment in the stock during the quarter. The following funds were also among the new MFA investors: Matthew Hulsizer’s PEAK6 Capital Management, Donald Sussman’s Paloma Partners, and Paul Tudor Jones’s Tudor Investment Corp.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as MFA Financial, Inc. (NYSE:MFA) but similarly valued. These stocks are The St. Joe Company (NYSE:JOE), Epizyme Inc (NASDAQ:EPZM), TechTarget Inc (NASDAQ:TTGT), Encore Capital Group, Inc. (NASDAQ:ECPG), BrightView Holdings, Inc. (NYSE:BV), Argo Group International Holdings, Ltd. (NYSE:ARGO), and Viper Energy Partners LP (NASDAQ:VNOM). This group of stocks’ market valuations are closest to MFA’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.3 hedge funds with bullish positions and the average amount invested in these stocks was $200 million. That figure was $38 million in MFA’s case. Epizyme Inc (NASDAQ:EPZM) is the most popular stock in this table. On the other hand Viper Energy Partners LP (NASDAQ:VNOM) is the least popular one with only 11 bullish hedge fund positions. MFA Financial, Inc. (NYSE:MFA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MFA is 67.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on MFA as the stock returned 42.9% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.