Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Select Energy Services, Inc. (NYSE:WTTR).
Select Energy Services, Inc. (NYSE:WTTR) investors should be aware of a decrease in support from the world’s most elite money managers of late. Our calculations also showed that WTTR 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to go over the key hedge fund action encompassing Select Energy Services, Inc. (NYSE:WTTR).
How have hedgies been trading Select Energy Services, Inc. (NYSE:WTTR)?
At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in WTTR over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Adage Capital Management was the largest shareholder of Select Energy Services, Inc. (NYSE:WTTR), with a stake worth $11.7 million reported as of the end of September. Trailing Adage Capital Management was Renaissance Technologies, which amassed a stake valued at $3.9 million. Water Asset Management, Millennium Management, and Winton Capital 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 Water Asset Management allocated the biggest weight to Select Energy Services, Inc. (NYSE:WTTR), around 4.11% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, earmarking 0.08 percent of its 13F equity portfolio to WTTR.
Since Select Energy Services, Inc. (NYSE:WTTR) has experienced a decline in interest from hedge fund managers, it’s safe to say that there is a sect of hedgies who sold off their entire stakes by the end of the third quarter. Interestingly, Till Bechtolsheimer’s Arosa Capital Management cut the largest position of the “upper crust” of funds monitored by Insider Monkey, totaling about $13.2 million in stock. Perella Weinberg Partners, also sold off its stock, about $8.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 1 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks similar to Select Energy Services, Inc. (NYSE:WTTR). These stocks are Stewart Information Services Corp (NYSE:STC), Kforce Inc. (NASDAQ:KFRC), HarborOne Bancorp, Inc. (NASDAQ:HONE), and MAG Silver Corporation (NYSEAMERICAN:MAG). This group of stocks’ market caps resemble WTTR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| STC | 17 | 92374 | 4 |
| KFRC | 19 | 78540 | 1 |
| HONE | 11 | 24308 | 7 |
| MAG | 12 | 26911 | 3 |
| Average | 14.75 | 55533 | 3.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $56 million. That figure was $23 million in WTTR’s case. Kforce Inc. (NASDAQ:KFRC) is the most popular stock in this table. On the other hand HarborOne Bancorp, Inc. (NASDAQ:HONE) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Select Energy Services, Inc. (NYSE:WTTR) is even less popular than HONE. Hedge funds dodged a bullet by taking a bearish stance towards WTTR. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WTTR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); WTTR investors were disappointed as the stock returned -11.3% 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
