Were Hedge Funds Right About Dumping Realty Income Corporation (O)?

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Realty Income Corporation (NYSE:O).

Realty Income Corporation (NYSE:O) investors should pay attention to a decrease in enthusiasm from smart money lately. Realty Income Corporation (NYSE:O) was in 18 hedge funds’ portfolios at the end of March. The all time high for this statistic is 26. Our calculations also showed that O isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Now let’s analyze the recent hedge fund action regarding Realty Income Corporation (NYSE:O).

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

Heading into the second quarter of 2021, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards O over the last 23 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

Is O A Good Stock To Buy?

More specifically, Millennium Management was the largest shareholder of Realty Income Corporation (NYSE:O), with a stake worth $40.5 million reported as of the end of March. Trailing Millennium Management was Two Sigma Advisors, which amassed a stake valued at $39.2 million. Citadel Investment Group, Adage Capital 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 Full18 Capital allocated the biggest weight to Realty Income Corporation (NYSE:O), around 0.51% of its 13F portfolio. AlphaCrest Capital Management is also relatively very bullish on the stock, designating 0.5 percent of its 13F equity portfolio to O.

Seeing as Realty Income Corporation (NYSE:O) has witnessed falling interest from the smart money, logic holds that there exists a select few fund managers who sold off their positions entirely heading into Q2. At the top of the heap, Eduardo Abush’s Waterfront Capital Partners said goodbye to the largest stake of all the hedgies followed by Insider Monkey, comprising close to $19.2 million in stock. Matthew Barrett’s fund, Glendon Capital Management, also said goodbye to its stock, about $4.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 6 funds heading into Q2.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Realty Income Corporation (NYSE:O) but similarly valued. We will take a look at Slack Technologies Inc (NYSE:WORK), PT Telekomunikasi Indonesia (NYSE:TLK), CDW Corporation (NASDAQ:CDW), Zscaler, Inc. (NASDAQ:ZS), PG&E Corporation (NYSE:PCG), Arista Networks Inc (NYSE:ANET), and Yandex NV (NASDAQ:YNDX). All of these stocks’ market caps resemble O’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WORK 60 4262404 -6
TLK 4 158462 0
CDW 30 1908866 -13
ZS 34 809507 -1
PCG 65 5665287 -1
ANET 26 253852 -9
YNDX 29 1260108 -5
Average 35.4 2045498 -5

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.4 hedge funds with bullish positions and the average amount invested in these stocks was $2045 million. That figure was $184 million in O’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand PT Telekomunikasi Indonesia (NYSE:TLK) is the least popular one with only 4 bullish hedge fund positions. Realty Income Corporation (NYSE:O) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for O is 31.2. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and beat the market by 10.1 percentage points. A small number of hedge funds were also right about betting on O, though not to the same extent, as the stock returned 12.1% since the end of Q1 (through July 23rd) and outperformed the market.

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