We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Annaly Capital Management, Inc. (NYSE:NLY) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Annaly Capital Management, Inc. (NYSE:NLY) was in 21 hedge funds’ portfolios at the end of December. NLY shareholders have witnessed an increase in hedge fund sentiment in recent months. There were 16 hedge funds in our database with NLY positions at the end of the previous quarter. Our calculations also showed that NLY isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a glance at the recent hedge fund action encompassing Annaly Capital Management, Inc. (NYSE:NLY).
How have hedgies been trading Annaly Capital Management, Inc. (NYSE:NLY)?
At Q4’s end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 31% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NLY over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Annaly Capital Management, Inc. (NYSE:NLY) was held by Renaissance Technologies, which reported holding $78.1 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $57.3 million position. Other investors bullish on the company included Balyasny Asset Management, Soros Fund Management, and Almitas Capital. In terms of the portfolio weights assigned to each position Almitas Capital allocated the biggest weight to Annaly Capital Management, Inc. (NYSE:NLY), around 7.57% of its 13F portfolio. Soros Fund Management is also relatively very bullish on the stock, designating 0.9 percent of its 13F equity portfolio to NLY.
Now, some big names were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, established the biggest position in Annaly Capital Management, Inc. (NYSE:NLY). Balyasny Asset Management had $35.6 million invested in the company at the end of the quarter. Ron Mass’s Almitas Capital also made a $8.7 million investment in the stock during the quarter. The other funds with brand new NLY positions are Mike Vranos’s Ellington, Renee Yao’s Neo Ivy Capital, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Annaly Capital Management, Inc. (NYSE:NLY) but similarly valued. We will take a look at HEICO Corporation (NYSE:HEI), CBOE Holdings, Inc (NASDAQ:CBOE), Plains All American Pipeline, L.P. (NYSE:PAA), and Galapagos NV (NASDAQ:GLPG). This group of stocks’ market values match NLY’s market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HEI,57,1205133,11 CBOE,27,1050257,1 PAA,12,168993,-5 GLPG,14,117885,1 Average,27.5,635567,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $636 million. That figure was $220 million in NLY’s case. HEICO Corporation (NYSE:HEI) is the most popular stock in this table. On the other hand Plains All American Pipeline, L.P. (NYSE:PAA) is the least popular one with only 12 bullish hedge fund positions. Annaly Capital Management, Inc. (NYSE:NLY) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately NLY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); NLY investors were disappointed as the stock returned -29.7% 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 in Q1.
Disclosure: None. This article was originally published at Insider Monkey.