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Were Hedge Funds Right About Piling Into Annaly Capital Management, Inc. (NLY)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Annaly Capital Management, Inc. (NYSE:NLY) and determine whether hedge funds had an edge regarding this stock.

Is Annaly Capital Management, Inc. (NYSE:NLY) a superb investment now? The smart money was betting on the stock. The number of long hedge fund positions inched up by 6 recently. Our calculations also showed that NLY 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.

According to most stock holders, hedge funds are viewed as unimportant, outdated investment tools of the past. While there are over 8000 funds with their doors open today, Our experts choose to focus on the elite of this group, about 850 funds. These money managers command most of the smart money’s total asset base, and by paying attention to their matchless equity investments, Insider Monkey has determined a number of investment strategies that have historically outrun the market. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Bill Miller

Bill Miller of Miller Value Partners

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. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a look at the latest hedge fund action surrounding Annaly Capital Management, Inc. (NYSE:NLY).

How are hedge funds trading Annaly Capital Management, Inc. (NYSE:NLY)?

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in NLY a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Annaly Capital Management, Inc. (NYSE:NLY), which was worth $60.3 million at the end of the third quarter. On the second spot was D E Shaw which amassed $54.4 million worth of shares. Citadel Investment Group, King Street Capital, and Point72 Asset Management 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 One Fin Capital Management allocated the biggest weight to Annaly Capital Management, Inc. (NYSE:NLY), around 5.38% of its 13F portfolio. King Street Capital is also relatively very bullish on the stock, designating 2.83 percent of its 13F equity portfolio to NLY.

Now, key hedge funds were leading the bulls’ herd. King Street Capital, managed by Brian J. Higgins, established the biggest position in Annaly Capital Management, Inc. (NYSE:NLY). King Street Capital had $25.4 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $18.9 million position during the quarter. The other funds with brand new NLY positions are Louis Bacon’s Moore Global Investments, David MacKnight’s One Fin Capital Management, and Bill Miller’s Miller Value Partners.

Let’s now review hedge fund activity in other stocks similar to Annaly Capital Management, Inc. (NYSE:NLY). We will take a look at Henry Schein, Inc. (NASDAQ:HSIC), Centrais Eletricas Brasileiras S.A. – Eletrobras (NYSE:EBR), Avantor, Inc. (NYSE:AVTR), and Ceridian HCM Holding Inc. (NYSE:CDAY). All of these stocks’ market caps are similar to NLY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HSIC 35 1058541 -1
EBR 5 9710 -2
AVTR 29 521496 1
CDAY 24 1189081 -7
Average 23.25 694707 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $695 million. That figure was $225 million in NLY’s case. Henry Schein, Inc. (NASDAQ:HSIC) is the most popular stock in this table. On the other hand Centrais Eletricas Brasileiras S.A. – Eletrobras (NYSE:EBR) is the least popular one with only 5 bullish hedge fund positions. Annaly Capital Management, Inc. (NYSE:NLY) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on NLY as the stock returned 33.9% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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