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Were Hedge Funds Right About Redwood Trust, Inc. (RWT) ?

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. Is Redwood Trust, Inc. (NYSE:RWT) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Redwood Trust, Inc. (NYSE:RWT) undervalued? Hedge funds are selling. The number of long hedge fund positions retreated by 5 recently. Our calculations also showed that RWT 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). RWT was in 13 hedge funds’ portfolios at the end of December. There were 18 hedge funds in our database with RWT holdings at the end of the previous quarter.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

With all of this in mind let’s take a look at the fresh hedge fund action regarding Redwood Trust, Inc. (NYSE:RWT).

What have hedge funds been doing with Redwood Trust, Inc. (NYSE:RWT)?

At the end of the fourth quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -28% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in RWT over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Wallace Weitz’s Wallace R. Weitz & Co. has the number one position in Redwood Trust, Inc. (NYSE:RWT), worth close to $53.8 million, amounting to 2.1% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies, with a $10.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other peers that hold long positions encompass Israel Englander’s Millennium Management, Mike Vranos’s Ellington and Steve Cohen’s Point72 Asset Management. In terms of the portfolio weights assigned to each position Wallace R. Weitz & Co. allocated the biggest weight to Redwood Trust, Inc. (NYSE:RWT), around 2.11% of its 13F portfolio. Ellington is also relatively very bullish on the stock, designating 1.41 percent of its 13F equity portfolio to RWT.

Since Redwood Trust, Inc. (NYSE:RWT) has witnessed declining sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of fund managers who sold off their entire stakes last quarter. Intriguingly, Howard Marks’s Oaktree Capital Management sold off the biggest position of all the hedgies followed by Insider Monkey, comprising about $17.9 million in stock. Wallace Weitz’s fund, Wallace R. Weitz & Co., also dumped its stock, about $16.1 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 5 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Redwood Trust, Inc. (NYSE:RWT). We will take a look at Group 1 Automotive, Inc. (NYSE:GPI), Portola Pharmaceuticals Inc (NASDAQ:PTLA), Progress Software Corporation (NASDAQ:PRGS), and McGrath RentCorp (NASDAQ:MGRC). This group of stocks’ market valuations are closest to RWT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GPI 22 173892 1
PTLA 27 221821 4
PRGS 20 222597 -2
MGRC 20 150034 -2
Average 22.25 192086 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $192 million. That figure was $96 million in RWT’s case. Portola Pharmaceuticals Inc (NASDAQ:PTLA) is the most popular stock in this table. On the other hand Progress Software Corporation (NASDAQ:PRGS) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Redwood Trust, Inc. (NYSE:RWT) is even less popular than PRGS. Hedge funds dodged a bullet by taking a bearish stance towards RWT. Our calculations showed that the top 20 most popular hedge fund stocks 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 managed to beat the market by 4.2 percentage points. Unfortunately RWT wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); RWT investors were disappointed as the stock returned -82.8% 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 so far 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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