Hedge Funds Love Meritage Homes (MTH) Way More Than These 3 Stocks

Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 9.9 percentage points through the end of November. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.

Meritage Homes Corporation (NYSE:MTH) investors should be aware of an increase in hedge fund sentiment lately. MTH was in 25 hedge funds' portfolios at the end of September. There were 15 hedge funds in our database with MTH positions at the end of the previous quarter. Our calculations also showed that MTH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). At the end of this article we will also compare MTH against similarly valued stocks like Acacia Communications, Inc. (NASDAQ:ACIA), Fluor Corporation (NYSE:FLR), Brooks Automation, Inc. (NASDAQ:BRKS), and Brandywine Realty Trust (NYSE:BDN).

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of signals investors employ to assess stocks. Two of the less utilized signals are hedge fund and insider trading signals. We have shown that, historically, those who follow the top picks of the top fund managers can outpace the broader indices by a superb margin (see the details here).

[caption id="attachment_42139" align="aligncenter" width="504"]

Ken Heebner of Capital Growth Management[/caption]

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the new hedge fund action regarding Meritage Homes Corporation (NYSE:MTH).

How have hedgies been trading Meritage Homes Corporation (NYSE:MTH)?

Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 67% from the previous quarter. On the other hand, there were a total of 13 hedge funds with a bullish position in MTH a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Fisher Asset Management was the largest shareholder of Meritage Homes Corporation (NYSE:MTH), with a stake worth $104.7 million reported as of the end of September. Trailing Fisher Asset Management was Capital Growth Management, which amassed a stake valued at $73.2 million. RR Partners, GLG Partners, and Citadel Investment Group 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 RR Partners allocated the biggest weight to Meritage Homes Corporation (NYSE:MTH), around 7.1% of its portfolio. Capital Growth Management is also relatively very bullish on the stock, designating 5.6 percent of its 13F equity portfolio to MTH.

As one would reasonably expect, specific money managers have been driving this bullishness. Capital Growth Management, managed by Ken Heebner, initiated the biggest position in Meritage Homes Corporation (NYSE:MTH). Capital Growth Management had $73.2 million invested in the company at the end of the quarter. Robert Bishop's Impala Asset Management also made a $15.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Andrew Sandler's Sandler Capital Management, Renaissance Technologies, and Paul Marshall and Ian Wace's Marshall Wace.

Let's go over hedge fund activity in other stocks similar to Meritage Homes Corporation (NYSE:MTH). We will take a look at Acacia Communications, Inc. (NASDAQ:ACIA), Fluor Corporation (NYSE:FLR), Brooks Automation, Inc. (NASDAQ:BRKS), and Brandywine Realty Trust (NYSE:BDN). This group of stocks' market valuations resemble MTH's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ACIA,25,507691,-3 FLR,18,210283,-3 BRKS,12,153378,-1 BDN,17,121356,3 Average,18,248177,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $248 million. That figure was $361 million in MTH's case. Acacia Communications, Inc. (NASDAQ:ACIA) is the most popular stock in this table. On the other hand Brooks Automation, Inc. (NASDAQ:BRKS) is the least popular one with only 12 bullish hedge fund positions. Meritage Homes Corporation (NYSE:MTH) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately MTH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on MTH were disappointed as the stock returned -5.4% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.

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

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