We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Workiva Inc (NYSE:WK).
Workiva Inc (NYSE:WK) investors should pay attention to a decrease in enthusiasm from smart money lately. WK was in 19 hedge funds’ portfolios at the end of the third quarter of 2019. There were 20 hedge funds in our database with WK holdings at the end of the previous quarter. Our calculations also showed that WK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
John Overdeck of Two Sigma Advisors
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. We’re going to analyze the key hedge fund action encompassing Workiva Inc (NYSE:WK).
How are hedge funds trading Workiva Inc (NYSE:WK)?
At the end of the third quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the second quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in WK a year ago. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Renaissance Technologies has the most valuable position in Workiva Inc (NYSE:WK), worth close to $83.1 million, corresponding to 0.1% of its total 13F portfolio. Coming in second is Hawk Ridge Management, led by David Brown, holding a $24.5 million position; 4.9% of its 13F portfolio is allocated to the company. Other peers that are bullish consist of David E. Shaw’s D E Shaw, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Hawk Ridge Management allocated the biggest weight to Workiva Inc (NYSE:WK), around 4.91% of its 13F portfolio. Osterweis Capital Management is also relatively very bullish on the stock, setting aside 0.2 percent of its 13F equity portfolio to WK.
Because Workiva Inc (NYSE:WK) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedge funds that elected to cut their entire stakes in the third quarter. It’s worth mentioning that Chuck Royce’s Royce & Associates dropped the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $7.4 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund cut about $0.7 million worth. These transactions are interesting, as total hedge fund interest was cut by 1 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Workiva Inc (NYSE:WK) but similarly valued. These stocks are TowneBank (NASDAQ:TOWN), Worthington Industries, Inc. (NYSE:WOR), CommVault Systems, Inc. (NASDAQ:CVLT), and Tellurian Inc. (NASDAQ:TELL). This group of stocks’ market values resemble WK’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TOWN | 6 | 45663 | -1 |
| WOR | 22 | 58920 | 9 |
| CVLT | 24 | 296800 | 5 |
| TELL | 14 | 52629 | 5 |
| Average | 16.5 | 113503 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $114 million. That figure was $173 million in WK’s case. CommVault Systems, Inc. (NASDAQ:CVLT) is the most popular stock in this table. On the other hand TowneBank (NASDAQ:TOWN) is the least popular one with only 6 bullish hedge fund positions. Workiva Inc (NYSE:WK) 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 WK wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WK were disappointed as the stock returned -1% 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.
