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Should You Avoid Apollo Commercial Real Est. Finance Inc (ARI)?

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Apollo Commercial Real Est. Finance Inc (NYSE:ARI) and see how it was affected.

Apollo Commercial Real Est. Finance Inc (NYSE:ARI) investors should be aware of a decrease in activity from the world’s largest hedge funds of late. Our calculations also showed that ARI 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.

New York Stock Exchange

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the fresh hedge fund action surrounding Apollo Commercial Real Est. Finance Inc (NYSE:ARI).

How have hedgies been trading Apollo Commercial Real Est. Finance Inc (NYSE:ARI)?

At Q3’s end, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ARI over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Millennium Management held the most valuable stake in Apollo Commercial Real Est. Finance Inc (NYSE:ARI), which was worth $17.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $14.6 million worth of shares. Winton Capital Management, AQR Capital Management, and Citadel Investment Group 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 Zebra Capital Management allocated the biggest weight to Apollo Commercial Real Est. Finance Inc (NYSE:ARI), around 0.36% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.09 percent of its 13F equity portfolio to ARI.

Due to the fact that Apollo Commercial Real Est. Finance Inc (NYSE:ARI) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there were a few fund managers who sold off their entire stakes last quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management dumped the largest position of the “upper crust” of funds tracked by Insider Monkey, comprising close to $4.6 million in stock. Jeffrey Talpins’s fund, Element Capital Management, also dumped its stock, about $1.8 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Apollo Commercial Real Est. Finance Inc (NYSE:ARI). These stocks are Washington Federal Inc. (NASDAQ:WAFD), Colony Capital Inc (NYSE:CLNY), Black Stone Minerals LP (NYSE:BSM), and Louisiana-Pacific Corporation (NYSE:LPX). This group of stocks’ market values are similar to ARI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WAFD 14 74488 5
CLNY 20 420255 4
BSM 7 7850 0
LPX 31 531921 4
Average 18 258629 3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $259 million. That figure was $56 million in ARI’s case. Louisiana-Pacific Corporation (NYSE:LPX) is the most popular stock in this table. On the other hand Black Stone Minerals LP (NYSE:BSM) is the least popular one with only 7 bullish hedge fund positions. Apollo Commercial Real Est. Finance Inc (NYSE:ARI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ARI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ARI investors were disappointed as the stock returned -4.7% during the first two months of the fourth quarter 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 in Q4.

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

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