Is Redwood Trust, Inc. (RWT) A Good Stock To Buy?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Redwood Trust, Inc. (NYSE:RWT) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Redwood Trust, Inc. (NYSE:RWT) was in 18 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 22. RWT has experienced a decrease in hedge fund interest of late. There were 22 hedge funds in our database with RWT positions at the end of the first quarter. Our calculations also showed that RWT isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

In the eyes of most stock holders, hedge funds are assumed to be unimportant, old financial tools of years past. While there are more than 8000 funds trading at the moment, Our experts look at the bigwigs of this group, approximately 850 funds. These hedge fund managers manage the majority of the hedge fund industry’s total capital, and by watching their highest performing investments, Insider Monkey has brought to light many investment strategies that have historically defeated the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

George Soros - Soros Fund Management

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 are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Now let’s go over the recent hedge fund action surrounding Redwood Trust, Inc. (NYSE:RWT).

How have hedgies been trading Redwood Trust, Inc. (NYSE:RWT)?

At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from one quarter earlier. On the other hand, there were a total of 13 hedge funds with a bullish position in RWT a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Is RWT A Good Stock To Buy?

More specifically, Wallace R. Weitz & Co. was the largest shareholder of Redwood Trust, Inc. (NYSE:RWT), with a stake worth $22.8 million reported as of the end of September. Trailing Wallace R. Weitz & Co. was Adage Capital Management, which amassed a stake valued at $8.8 million. Citadel Investment Group, Winton Capital Management, and Millennium 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 Wallace R. Weitz & Co. allocated the biggest weight to Redwood Trust, Inc. (NYSE:RWT), around 1.13% of its 13F portfolio. Corriente Advisors is also relatively very bullish on the stock, earmarking 0.34 percent of its 13F equity portfolio to RWT.

Since Redwood Trust, Inc. (NYSE:RWT) has faced falling interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of money managers that slashed their positions entirely last quarter. Interestingly, Steve Cohen’s Point72 Asset Management dropped the largest position of all the hedgies followed by Insider Monkey, worth an estimated $13.8 million in stock. Eric Schneider’s fund, OCO Capital Partners, also said goodbye to its stock, about $10.1 million worth. These moves are interesting, as total hedge fund interest was cut by 4 funds last quarter.

Let’s check out 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 Douglas Dynamics Inc (NYSE:PLOW), Omeros Corporation (NASDAQ:OMER), ImmunoGen, Inc. (NASDAQ:IMGN), Cara Therapeutics Inc (NASDAQ:CARA), Sirius International Insurance Group, Ltd. (NASDAQ:SG), Applied Therapeutics, Inc. (NASDAQ:APLT), and RadNet Inc. (NASDAQ:RDNT). All of these stocks’ market caps are similar to RWT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PLOW 7 4343 -2
OMER 7 135006 -2
IMGN 20 159245 1
CARA 18 103957 8
SG 2 1371 0
APLT 14 188219 -2
RDNT 14 56208 -2
Average 11.7 92621 0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.7 hedge funds with bullish positions and the average amount invested in these stocks was $93 million. That figure was $48 million in RWT’s case. ImmunoGen, Inc. (NASDAQ:IMGN) is the most popular stock in this table. On the other hand Sirius International Insurance Group, Ltd. (NASDAQ:SG) is the least popular one with only 2 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. Our overall hedge fund sentiment score for RWT is 70. 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 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 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on RWT, though not to the same extent, as the stock returned 9.3% in Q3 and outperformed the market as well.

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