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Were Hedge Funds Right About Piling Into Lennar Corporation (LEN)?

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 Lennar Corporation (NYSE:LEN) and determine whether hedge funds had an edge regarding this stock.

Lennar Corporation (NYSE:LEN) shareholders have witnessed a decrease in enthusiasm from smart money lately. Our calculations also showed that LEN 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.

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 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Curtis Schenker of Scoggin

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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 let’s take a glance at the fresh hedge fund action regarding Lennar Corporation (NYSE:LEN).

What does smart money think about Lennar Corporation (NYSE:LEN)?

At Q1’s end, a total of 57 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. On the other hand, there were a total of 61 hedge funds with a bullish position in LEN a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Is LEN A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, Greenhaven Associates, managed by Edgar Wachenheim, holds the largest position in Lennar Corporation (NYSE:LEN). Greenhaven Associates has a $367.9 million position in the stock, comprising 13.7% of its 13F portfolio. Sitting at the No. 2 spot is Eminence Capital, managed by Ricky Sandler, which holds a $158.6 million position; 1.7% of its 13F portfolio is allocated to the company. Some other peers that hold long positions contain Glenn Greenberg’s Brave Warrior Capital, Ken Fisher’s Fisher Asset Management and Bill Miller’s Miller Value Partners. In terms of the portfolio weights assigned to each position Greenhaven Associates allocated the biggest weight to Lennar Corporation (NYSE:LEN), around 13.69% of its 13F portfolio. Capital Growth Management is also relatively very bullish on the stock, earmarking 4.99 percent of its 13F equity portfolio to LEN.

Since Lennar Corporation (NYSE:LEN) has experienced declining sentiment from the smart money, we can see that there were a few funds that elected to cut their full holdings heading into Q4. It’s worth mentioning that John Khoury’s Long Pond Capital dumped the biggest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $79.3 million in stock, and Gavin M. Abrams’s Abrams Bison Investments was right behind this move, as the fund dropped about $69.2 million worth. These transactions are important to note, as total hedge fund interest was cut by 6 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Lennar Corporation (NYSE:LEN) but similarly valued. We will take a look at Duke Realty Corporation (NYSE:DRE), Jack Henry & Associates, Inc. (NASDAQ:JKHY), Omnicom Group Inc. (NYSE:OMC), and Paycom Software Inc (NYSE:PAYC). All of these stocks’ market caps resemble LEN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DRE 16 64897 -8
JKHY 27 277076 -2
OMC 31 327865 9
PAYC 30 239228 3
Average 26 227267 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $227 million. That figure was $1121 million in LEN’s case. Omnicom Group Inc. (NYSE:OMC) is the most popular stock in this table. On the other hand Duke Realty Corporation (NYSE:DRE) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Lennar Corporation (NYSE:LEN) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on LEN as the stock returned 61.8% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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