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Were Hedge Funds Right About Selling Front Yard Residential Corporation (RESI)?

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 Front Yard Residential Corporation (NYSE:RESI) and determine whether hedge funds had an edge regarding this stock.

Front Yard Residential Corporation (NYSE:RESI) has experienced a decrease in enthusiasm from smart money lately. Our calculations also showed that RESI 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.

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 has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Fred DiSanto Ancora Advisors

Fred DiSanto of Ancora Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 most profitable companies in the world to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind let’s take a look at the latest hedge fund action encompassing Front Yard Residential Corporation (NYSE:RESI).

How are hedge funds trading Front Yard Residential Corporation (NYSE:RESI)?

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in RESI a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

Is RESI A Good Stock To Buy?

Among these funds, Pentwater Capital Management held the most valuable stake in Front Yard Residential Corporation (NYSE:RESI), which was worth $21.8 million at the end of the third quarter. On the second spot was Water Island Capital which amassed $12.6 million worth of shares. Sand Grove Capital Partners, Millennium Management, and Arrowstreet Capital 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 Sand Grove Capital Partners allocated the biggest weight to Front Yard Residential Corporation (NYSE:RESI), around 1.68% of its 13F portfolio. Water Island Capital is also relatively very bullish on the stock, setting aside 0.91 percent of its 13F equity portfolio to RESI.

Because Front Yard Residential Corporation (NYSE:RESI) has experienced falling interest from the aggregate hedge fund industry, we can see that there was a specific group of fund managers that decided to sell off their full holdings in the first quarter. Intriguingly, Noam Gottesman’s GLG Partners sold off the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth about $10.6 million in stock. Mike Vranos’s fund, Ellington, also dropped its stock, about $3.6 million worth. These moves are important to note, as total hedge fund interest was cut by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Front Yard Residential Corporation (NYSE:RESI) but similarly valued. These stocks are Carolina Financial Corporation (NASDAQ:CARO), Opera Limited (NASDAQ:OPRA), Maxar Technologies Inc (NYSE:MAXR), and CryoPort, Inc. (NASDAQ:CYRX). This group of stocks’ market caps are closest to RESI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CARO 10 25235 1
OPRA 6 5060 -9
MAXR 16 65956 3
CYRX 9 48542 1
Average 10.25 36198 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $36 million. That figure was $50 million in RESI’s case. Maxar Technologies Inc (NYSE:MAXR) is the most popular stock in this table. On the other hand Opera Limited (NASDAQ:OPRA) is the least popular one with only 6 bullish hedge fund positions. Front Yard Residential Corporation (NYSE:RESI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately RESI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RESI were disappointed as the stock returned -29.5% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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