We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Mr. Cooper Group Inc. (NASDAQ:COOP) and determine whether hedge funds skillfully traded this stock.
Mr. Cooper Group Inc. (NASDAQ:COOP) was in 24 hedge funds’ portfolios at the end of June. The all time high for this statistics is 34. COOP shareholders have witnessed an increase in enthusiasm from smart money in recent months. There were 19 hedge funds in our database with COOP positions at the end of the first quarter. Our calculations also showed that COOP 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.
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 56 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, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Keeping this in mind let’s take a glance at the latest hedge fund action regarding Mr. Cooper Group Inc. (NASDAQ:COOP).
Hedge fund activity in Mr. Cooper Group Inc. (NASDAQ:COOP)
At Q2’s end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 26% from one quarter earlier. By comparison, 23 hedge funds held shares or bullish call options in COOP a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
The largest stake in Mr. Cooper Group Inc. (NASDAQ:COOP) was held by Diamond Hill Capital, which reported holding $68 million worth of stock at the end of September. It was followed by Omega Advisors with a $51.6 million position. Other investors bullish on the company included Greywolf Capital Management, OCO Capital Partners, and Oaktree Capital Management. In terms of the portfolio weights assigned to each position Greywolf Capital Management allocated the biggest weight to Mr. Cooper Group Inc. (NASDAQ:COOP), around 64.65% of its 13F portfolio. OCO Capital Partners is also relatively very bullish on the stock, dishing out 46.39 percent of its 13F equity portfolio to COOP.
As industrywide interest jumped, specific money managers were leading the bulls’ herd. AQR Capital Management, managed by Cliff Asness, established the most valuable position in Mr. Cooper Group Inc. (NASDAQ:COOP). AQR Capital Management had $1 million invested in the company at the end of the quarter. Ken Grossman and Glen Schneider’s SG Capital Management also initiated a $0.9 million position during the quarter. The following funds were also among the new COOP investors: Brian C. Freckmann’s Lyon Street Capital, Israel Englander’s Millennium Management, and Jonathan Soros’s JS Capital.
Let’s now review hedge fund activity in other stocks similar to Mr. Cooper Group Inc. (NASDAQ:COOP). We will take a look at Arcus Biosciences, Inc. (NYSE:RCUS), Canadian Solar Inc. (NASDAQ:CSIQ), Repare Therapeutics Inc. (NASDAQ:RPTX), Hope Bancorp, Inc. (NASDAQ:HOPE), eXp World Holdings, Inc. (NASDAQ:EXPI), Marcus & Millichap Inc (NYSE:MMI), and Compass Diversified (NYSE:CODI). This group of stocks’ market values match COOP’s market value.
|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 14.1 hedge funds with bullish positions and the average amount invested in these stocks was $127 million. That figure was $288 million in COOP’s case. Arcus Biosciences, Inc. (NYSE:RCUS) is the most popular stock in this table. On the other hand Compass Diversified (NYSE:CODI) is the least popular one with only 4 bullish hedge fund positions. Mr. Cooper Group Inc. (NASDAQ:COOP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for COOP is 72.8. 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. Hedge funds were also right about betting on COOP as the stock returned 68.2% during Q3 (through September 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.