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 NexPoint Real Estate Finance, Inc. (NYSE:NREF).
Is NexPoint Real Estate Finance, Inc. (NYSE:NREF) a healthy stock for your portfolio? The smart money was in a bullish mood. The number of long hedge fund positions went up by 1 lately. NexPoint Real Estate Finance, Inc. (NYSE:NREF) was in 6 hedge funds’ portfolios at the end of September. The all time high for this statistics is 5. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that NREF isn’t among the 30 most popular stocks among hedge funds (click for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind we’re going to take a gander at the fresh hedge fund action surrounding NexPoint Real Estate Finance, Inc. (NYSE:NREF).
How are hedge funds trading NexPoint Real Estate Finance, Inc. (NYSE:NREF)?
At the end of September, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the second quarter of 2020. On the other hand, there were a total of 0 hedge funds with a bullish position in NREF a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
More specifically, Highland Capital Management was the largest shareholder of NexPoint Real Estate Finance, Inc. (NYSE:NREF), with a stake worth $3 million reported as of the end of September. Trailing Highland Capital Management was Alyeska Investment Group, which amassed a stake valued at $2.4 million. Renaissance Technologies, Precept Capital Management, and Lyon Street 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 Lyon Street Capital allocated the biggest weight to NexPoint Real Estate Finance, Inc. (NYSE:NREF), around 1.27% of its 13F portfolio. Highland Capital Management is also relatively very bullish on the stock, setting aside 0.68 percent of its 13F equity portfolio to NREF.
Now, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, created the largest position in NexPoint Real Estate Finance, Inc. (NYSE:NREF). Millennium Management had $0.2 million invested in the company at the end of the quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as NexPoint Real Estate Finance, Inc. (NYSE:NREF) but similarly valued. These stocks are China Customer Relations Centers, Inc. (NASDAQ:CCRC), electroCore, Inc. (NASDAQ:ECOR), Farmer Brothers Co. (NASDAQ:FARM), Acme United Corporation (NYSE:ACU), Strattec Security Corp. (NASDAQ:STRT), Citizens Community Bancorp Inc. (NASDAQ:CZWI), and Nabriva Therapeutics plc (NASDAQ:NBRV). All of these stocks’ market caps resemble NREF’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 5.1 hedge funds with bullish positions and the average amount invested in these stocks was $8 million. That figure was $8 million in NREF’s case. Farmer Brothers Co. (NASDAQ:FARM) is the most popular stock in this table. On the other hand China Customer Relations Centers, Inc. (NASDAQ:CCRC) is the least popular one with only 1 bullish hedge fund positions. NexPoint Real Estate Finance, Inc. (NYSE:NREF) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NREF is 56.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. Hedge funds were also right about betting on NREF as the stock returned 15.6% since the end of Q3 (through 11/27) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.