As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the third quarter. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Wells Fargo & Company (NYSE:WFC).
Is Wells Fargo & Company (NYSE:WFC) a marvelous investment right now? Investors who are in the know are getting less optimistic. The number of long hedge fund positions retreated by 3 in recent months. Our calculations also showed that WFC 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.
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 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.
Warren Buffett of Berkshire Hathaway
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 take a gander at the key hedge fund action encompassing Wells Fargo & Company (NYSE:WFC).
How have hedgies been trading Wells Fargo & Company (NYSE:WFC)?
At the end of the third quarter, a total of 62 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2019. On the other hand, there were a total of 79 hedge funds with a bullish position in WFC a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Berkshire Hathaway held the most valuable stake in Wells Fargo & Company (NYSE:WFC), which was worth $19084.9 million at the end of the third quarter. On the second spot was Eagle Capital Management which amassed $1421.5 million worth of shares. Gardner Russo & Gardner, Theleme Partners, and Pzena Investment Management 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 Magnolia Capital Fund allocated the biggest weight to Wells Fargo & Company (NYSE:WFC), around 37.88% of its portfolio. Theleme Partners is also relatively very bullish on the stock, earmarking 24.1 percent of its 13F equity portfolio to WFC.
Since Wells Fargo & Company (NYSE:WFC) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that slashed their entire stakes in the third quarter. Intriguingly, Anthony Bozza’s Lakewood Capital Management cut the biggest investment of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $50.8 million in stock. Michael Kharitonov and Jon David McAuliffe’s fund, Voleon Capital, also said goodbye to its stock, about $40.2 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds in the third quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Wells Fargo & Company (NYSE:WFC) but similarly valued. We will take a look at Merck & Co., Inc. (NYSE:MRK), The Boeing Company (NYSE:BA), Cisco Systems, Inc. (NASDAQ:CSCO), and UnitedHealth Group Incorporated (NYSE:UNH). This group of stocks’ market valuations resemble WFC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MRK | 73 | 4568239 | 3 |
| BA | 78 | 3964531 | 4 |
| CSCO | 58 | 4154237 | 3 |
| UNH | 77 | 5610847 | 9 |
| Average | 71.5 | 4574464 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 71.5 hedge funds with bullish positions and the average amount invested in these stocks was $4574 million. That figure was $25231 million in WFC’s case. The Boeing Company (NYSE:BA) is the most popular stock in this table. On the other hand Cisco Systems, Inc. (NASDAQ:CSCO) is the least popular one with only 58 bullish hedge fund positions. Wells Fargo & Company (NYSE:WFC) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on WFC, though not to the same extent, as the stock returned 9% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
