Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is Webster Financial Corporation (NYSE:WBS) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.
Webster Financial Corporation (NYSE:WBS) was in 24 hedge funds’ portfolios at the end of the fourth quarter of 2019. WBS investors should pay attention to a decrease in enthusiasm from smart money in recent months. There were 25 hedge funds in our database with WBS holdings at the end of the previous quarter. Our calculations also showed that WBS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 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 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.
Richard S. Pzena of Pzena Investment Management
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 let’s analyze the latest hedge fund action surrounding Webster Financial Corporation (NYSE:WBS).
What have hedge funds been doing with Webster Financial Corporation (NYSE:WBS)?
Heading into the first quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards WBS over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Pzena Investment Management held the most valuable stake in Webster Financial Corporation (NYSE:WBS), which was worth $106.6 million at the end of the third quarter. On the second spot was Nitorum Capital which amassed $97.1 million worth of shares. Citadel Investment Group, Polaris Capital Management, and Azora Capital 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 Nitorum Capital allocated the biggest weight to Webster Financial Corporation (NYSE:WBS), around 5.44% of its 13F portfolio. Azora Capital is also relatively very bullish on the stock, earmarking 4.77 percent of its 13F equity portfolio to WBS.
Judging by the fact that Webster Financial Corporation (NYSE:WBS) has faced bearish sentiment from hedge fund managers, it’s safe to say that there were a few hedgies that slashed their entire stakes last quarter. At the top of the heap, Paul Reeder and Edward Shapiro’s PAR Capital Management dumped the largest position of all the hedgies watched by Insider Monkey, totaling about $9.8 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund dropped about $2.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 1 funds last quarter.
Let’s also examine hedge fund activity in other stocks similar to Webster Financial Corporation (NYSE:WBS). These stocks are Spirit Realty Capital Inc (NYSE:SRC), Pinnacle Financial Partners, Inc. (NASDAQ:PNFP), MasTec, Inc. (NYSE:MTZ), and MSA Safety Incorporated (NYSE:MSA). All of these stocks’ market caps are similar to WBS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SRC | 26 | 236430 | 5 |
| PNFP | 16 | 105654 | 0 |
| MTZ | 41 | 286474 | 8 |
| MSA | 15 | 44149 | 5 |
| Average | 24.5 | 168177 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $168 million. That figure was $473 million in WBS’s case. MasTec, Inc. (NYSE:MTZ) is the most popular stock in this table. On the other hand MSA Safety Incorporated (NYSE:MSA) is the least popular one with only 15 bullish hedge fund positions. Webster Financial Corporation (NYSE:WBS) 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately WBS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WBS investors were disappointed as the stock returned -61.9% 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
