At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Two Harbors Investment Corp (NYSE:TWO).
Two Harbors Investment Corp (NYSE:TWO) has experienced an increase in hedge fund sentiment in recent months. Two Harbors Investment Corp (NYSE:TWO) was in 17 hedge funds’ portfolios at the end of September. The all time high for this statistic is 24. Our calculations also showed that TWO 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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 look at the new hedge fund action encompassing Two Harbors Investment Corp (NYSE:TWO).
Do Hedge Funds Think TWO Is A Good Stock To Buy Now?
At third quarter’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from one quarter earlier. On the other hand, there were a total of 16 hedge funds with a bullish position in TWO a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Rubric Capital Management, managed by David Rosen, holds the number one position in Two Harbors Investment Corp (NYSE:TWO). Rubric Capital Management has a $13.2 million position in the stock, comprising 1.2% of its 13F portfolio. Coming in second is Israel Englander of Millennium Management, with a $6.2 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism encompass Ken Griffin’s Citadel Investment Group, Dmitry Balyasny’s Balyasny Asset Management and Bill Miller’s Miller Value Partners. In terms of the portfolio weights assigned to each position Rubric Capital Management allocated the biggest weight to Two Harbors Investment Corp (NYSE:TWO), around 1.23% of its 13F portfolio. Diametric Capital is also relatively very bullish on the stock, earmarking 0.47 percent of its 13F equity portfolio to TWO.
As one would reasonably expect, key money managers were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the most outsized position in Two Harbors Investment Corp (NYSE:TWO). Balyasny Asset Management had $3.5 million invested in the company at the end of the quarter. Nick Thakore’s Diametric Capital also made a $0.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Gavin Saitowitz and Cisco J. del Valle’s Prelude Capital (previously Springbok Capital), D. E. Shaw’s D E Shaw, and Donald Sussman’s Paloma Partners.
Let’s now review hedge fund activity in other stocks similar to Two Harbors Investment Corp (NYSE:TWO). These stocks are Axos Financial, Inc. (NYSE:AX), Mednax Inc. (NYSE:MD), SITE Centers Corp. (NYSE:SITC), Chesapeake Utilities Corporation (NYSE:CPK), Tri Continental Corporation (NYSE:TY), GreenTree Hospitality Group Ltd. (NYSE:GHG), and Northwest Natural Holding Company (NYSE:NWN). All of these stocks’ market caps are closest to TWO’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 11.6 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $37 million in TWO’s case. Mednax Inc. (NYSE:MD) is the most popular stock in this table. On the other hand Tri Continental Corporation (NYSE:TY) is the least popular one with only 2 bullish hedge fund positions. Two Harbors Investment Corp (NYSE:TWO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TWO is 64.8. 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 December 14th and still beat the market by 15.8 percentage points. Hedge funds were also right about betting on TWO as the stock returned 28.1% since the end of Q3 (through 12/14) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Follow Two Harbors Investment Corp. (NYSE:TWO)
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Disclosure: None. This article was originally published at Insider Monkey.