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Were Hedge Funds Right About Alexandria Real Estate Equities Inc (ARE)?

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). 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 Alexandria Real Estate Equities Inc (NYSE:ARE) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Alexandria Real Estate Equities Inc (NYSE:ARE) shareholders have witnessed an increase in enthusiasm from smart money in recent months. ARE was in 29 hedge funds’ portfolios at the end of March. There were 21 hedge funds in our database with ARE holdings at the end of the previous quarter. Our calculations also showed that ARE isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 58 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to go over the latest hedge fund action encompassing Alexandria Real Estate Equities Inc (NYSE:ARE).

What does smart money think about Alexandria Real Estate Equities Inc (NYSE:ARE)?

At Q1’s end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from the fourth quarter of 2019. On the other hand, there were a total of 17 hedge funds with a bullish position in ARE 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.

Among these funds, Millennium Management held the most valuable stake in Alexandria Real Estate Equities Inc (NYSE:ARE), which was worth $29.1 million at the end of the third quarter. On the second spot was Land & Buildings Investment Management which amassed $25.3 million worth of shares. Adage Capital Management, Balyasny Asset Management, and Renaissance Technologies 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 Land & Buildings Investment Management allocated the biggest weight to Alexandria Real Estate Equities Inc (NYSE:ARE), around 10.21% of its 13F portfolio. LDR Capital is also relatively very bullish on the stock, earmarking 5.81 percent of its 13F equity portfolio to ARE.

Consequently, specific money managers were breaking ground themselves. Land & Buildings Investment Management, managed by Jonathan Litt, initiated the most outsized position in Alexandria Real Estate Equities Inc (NYSE:ARE). Land & Buildings Investment Management had $25.3 million invested in the company at the end of the quarter. Renaissance Technologies also made a $16.5 million investment in the stock during the quarter. The other funds with new positions in the stock are George McCabe’s Portolan Capital Management, Kamyar Khajavi’s MIK Capital, and Lawrence Raiman’s LDR Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Alexandria Real Estate Equities Inc (NYSE:ARE) but similarly valued. These stocks are TransDigm Group Incorporated (NYSE:TDG), The Williams Companies, Inc. (NYSE:WMB), Realty Income Corporation (NYSE:O), and New Oriental Education & Technology Group Inc. (NYSE:EDU). This group of stocks’ market values resemble ARE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TDG 58 3800759 -5
WMB 47 552828 7
O 25 225190 -1
EDU 42 1555475 -8
Average 43 1533563 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 43 hedge funds with bullish positions and the average amount invested in these stocks was $1534 million. That figure was $196 million in ARE’s case. TransDigm Group Incorporated (NYSE:TDG) is the most popular stock in this table. On the other hand Realty Income Corporation (NYSE:O) is the least popular one with only 25 bullish hedge fund positions. Alexandria Real Estate Equities Inc (NYSE:ARE) 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 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately ARE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ARE investors were disappointed as the stock returned 19.2% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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