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Were Hedge Funds Right About LGI Homes Inc (LGIH)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. After several tireless days we have finished crunching the numbers from nearly 835 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms’ equity portfolios as of December 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards LGI Homes Inc (NASDAQ:LGIH).

Is LGI Homes Inc (NASDAQ:LGIH) going to take off soon? The best stock pickers are selling. The number of bullish hedge fund bets decreased by 2 lately. Our calculations also showed that LGIH isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). LGIH was in 13 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 15 hedge funds in our database with LGIH holdings at the end of the previous quarter.

To most shareholders, hedge funds are perceived as slow, old investment tools of yesteryear. While there are more than 8000 funds trading today, Our experts hone in on the moguls of this club, approximately 850 funds. Most estimates calculate that this group of people direct the majority of all hedge funds’ total capital, and by keeping an eye on their inimitable picks, Insider Monkey has identified several investment strategies that have historically outpaced Mr. Market. Insider Monkey’s flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a glance at the recent hedge fund action surrounding LGI Homes Inc (NASDAQ:LGIH).

What does smart money think about LGI Homes Inc (NASDAQ:LGIH)?

At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LGIH over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Israel Englander’s Millennium Management has the number one position in LGI Homes Inc (NASDAQ:LGIH), worth close to $24.7 million, amounting to less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Royce & Associates, led by Chuck Royce, holding a $14.4 million position; 0.1% of its 13F portfolio is allocated to the stock. Other peers that are bullish consist of Douglas Dethy’s DC Capital Partners, Peter Muller’s PDT Partners and Phil Frohlich’s Prescott Group Capital Management. In terms of the portfolio weights assigned to each position DC Capital Partners allocated the biggest weight to LGI Homes Inc (NASDAQ:LGIH), around 24.26% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, designating 1.22 percent of its 13F equity portfolio to LGIH.

Due to the fact that LGI Homes Inc (NASDAQ:LGIH) has experienced a decline in interest from the aggregate hedge fund industry, we can see that there exists a select few hedgies that decided to sell off their positions entirely heading into Q4. Intriguingly, Ken Griffin’s Citadel Investment Group said goodbye to the largest investment of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $118.5 million in stock, and Richard Driehaus’s Driehaus Capital was right behind this move, as the fund dropped about $25.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 2 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to LGI Homes Inc (NASDAQ:LGIH). These stocks are The RealReal, Inc. (NASDAQ:REAL), Tronox Holdings plc (NYSE:TROX), Cardlytics, Inc. (NASDAQ:CDLX), and Avanos Medical, Inc. (NYSE:AVNS). This group of stocks’ market values are similar to LGIH’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
REAL 13 153969 -8
TROX 23 138148 3
CDLX 26 438746 7
AVNS 8 151007 -6
Average 17.5 220468 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $220 million. That figure was $66 million in LGIH’s case. Cardlytics, Inc. (NASDAQ:CDLX) is the most popular stock in this table. On the other hand Avanos Medical (NYSE:AVNS) is the least popular one with only 8 bullish hedge fund positions. LGI Homes Inc (NASDAQ:LGIH) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately LGIH wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LGIH investors were disappointed as the stock returned -41.6% during the same time period 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 most of these stocks already outperformed the market in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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