Is RWT A Good Investment Right Now?

With the third-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the fourth quarter. One of these stocks was Redwood Trust, Inc. (NYSE:RWT).

Is RWT a good investment right now? Redwood Trust, Inc. (NYSE:RWT) was in 15 hedge funds’ portfolios at the end of September. The all time high for this statistic is 22. RWT investors should be aware of a decrease in hedge fund sentiment recently. There were 18 hedge funds in our database with RWT positions at the end of the second quarter. Our calculations also showed that RWT 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.

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 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.


Paul Tudor Jones of Tudor Investment Corp

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. Now we’re going to take a glance at the fresh hedge fund action encompassing Redwood Trust, Inc. (NYSE:RWT).

Do Hedge Funds Think RWT Is A Good Stock To Buy Now?

At third quarter’s end, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 18 hedge funds with a bullish position in RWT a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Wallace R. Weitz & Co., managed by Wallace Weitz, holds the most valuable position in Redwood Trust, Inc. (NYSE:RWT). Wallace R. Weitz & Co. has a $13.4 million position in the stock, comprising 0.6% of its 13F portfolio. The second most bullish fund manager is Adage Capital Management, managed by Phill Gross and Robert Atchinson, which holds a $11.6 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that hold long positions consist of Ken Griffin’s Citadel Investment Group, Israel Englander’s Millennium Management and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Gratia Capital allocated the biggest weight to Redwood Trust, Inc. (NYSE:RWT), around 2.37% of its 13F portfolio. Wallace R. Weitz & Co. is also relatively very bullish on the stock, designating 0.63 percent of its 13F equity portfolio to RWT.

Due to the fact that Redwood Trust, Inc. (NYSE:RWT) has faced falling interest from hedge fund managers, we can see that there exists a select few funds who were dropping their full holdings in the third quarter. Interestingly, David Harding’s Winton Capital Management dumped the largest investment of the 750 funds followed by Insider Monkey, comprising close to $4.4 million in stock. Carl Goldsmith and Scott Klein’s fund, Beach Point Capital Management, also cut its stock, about $1.7 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 3 funds in the third quarter.

Let’s now review hedge fund activity in other stocks similar to Redwood Trust, Inc. (NYSE:RWT). We will take a look at Eagle Bancorp, Inc. (NASDAQ:EGBN), BGC Partners, Inc. (NASDAQ:BGCP), John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS), The RMR Group Inc. (NASDAQ:RMR), Ladder Capital Corp (NYSE:LADR), Forestar Group Inc. (NYSE:FOR), and Arcos Dorados Holding Inc (NYSE:ARCO). This group of stocks’ market caps match RWT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EGBN 13 16947 -2
BGCP 23 110947 -5
JBSS 14 67309 0
RMR 13 80620 -1
LADR 14 25044 0
FOR 11 102043 -3
ARCO 12 39048 -3
Average 14.3 63137 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.3 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $42 million in RWT’s case. BGC Partners, Inc. (NASDAQ:BGCP) is the most popular stock in this table. On the other hand Forestar Group Inc. (NYSE:FOR) is the least popular one with only 11 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 39.1. 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 RWT as the stock returned 18.4% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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