Hedge Funds Are Souring On Watsco Inc (WSO)

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 Watsco Inc (NYSE:WSO).

Is Watsco Inc (NYSE:WSO) a healthy stock for your portfolio? Investors who are in the know were taking a pessimistic view. The number of bullish hedge fund positions dropped by 2 lately. Watsco Inc (NYSE:WSO) was in 22 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 29. Our calculations also showed that WSO isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 24 hedge funds in our database with WSO holdings at the end of December.

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 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 115 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.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now let’s take a gander at the new hedge fund action regarding Watsco Inc (NYSE:WSO).

Do Hedge Funds Think WSO Is A Good Stock To Buy Now?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in WSO a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, Markel Gayner Asset Management held the most valuable stake in Watsco Inc (NYSE:WSO), which was worth $105.2 million at the end of the fourth quarter. On the second spot was Motley Fool Asset Management which amassed $48.2 million worth of shares. Renaissance Technologies, AQR Capital Management, and Royce & Associates 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 0 allocated the biggest weight to Watsco Inc (NYSE:WSO), around 3.47% of its 13F portfolio. 0 is also relatively very bullish on the stock, designating 1.46 percent of its 13F equity portfolio to WSO.

Since Watsco Inc (NYSE:WSO) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there exists a select few funds that decided to sell off their entire stakes by the end of the first quarter. Interestingly, Paul Tudor Jones’s Tudor Investment Corp cut the largest position of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $2.3 million in stock, and Seth Cogswell’s Running Oak Capital was right behind this move, as the fund dumped about $2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 2 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Watsco Inc (NYSE:WSO) but similarly valued. We will take a look at Cleveland-Cliffs Inc (NYSE:CLF), Dolby Laboratories, Inc. (NYSE:DLB), Aegon N.V. (NYSE:AEG), Comerica Incorporated (NYSE:CMA), Floor & Decor Holdings, Inc. (NYSE:FND), Elastic N.V. (NYSE:ESTC), and Everest Re Group Ltd (NYSE:RE). This group of stocks’ market caps are similar to WSO’s market cap.

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As you can see these stocks had an average of 32.9 hedge funds with bullish positions and the average amount invested in these stocks was $855 million. That figure was $280 million in WSO’s case. Elastic N.V. (NYSE:ESTC) is the most popular stock in this table. On the other hand Aegon N.V. (NYSE:AEG) is the least popular one with only 6 bullish hedge fund positions. Watsco Inc (NYSE:WSO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for WSO is 43.1. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and beat the market by 7.7 percentage points. A small number of hedge funds were also right about betting on WSO, though not to the same extent, as the stock returned 9.9% since the end of Q1 (through July 16th) and outperformed the market.

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