Hedge Funds Have Never Been This Bullish On Waters Corporation (WAT)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Waters Corporation (NYSE:WAT) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Waters Corporation (NYSE:WAT) a first-rate investment now? The best stock pickers were becoming hopeful. The number of long hedge fund bets moved up by 13 in recent months. Waters Corporation (NYSE:WAT) was in 38 hedge funds’ portfolios at the end of June. The all time high for this statistics is 32. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that WAT isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 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. 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.

David Blood of Generation Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s analyze the key hedge fund action encompassing Waters Corporation (NYSE:WAT).

What have hedge funds been doing with Waters Corporation (NYSE:WAT)?

At the end of June, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 52% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in WAT over the last 20 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

More specifically, D E Shaw was the largest shareholder of Waters Corporation (NYSE:WAT), with a stake worth $83.6 million reported as of the end of September. Trailing D E Shaw was Citadel Investment Group, which amassed a stake valued at $82.8 million. Impax Asset Management, Select Equity Group, and Generation 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 Fairpointe Capital allocated the biggest weight to Waters Corporation (NYSE:WAT), around 1.39% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, designating 1.12 percent of its 13F equity portfolio to WAT.

Now, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, initiated the biggest position in Waters Corporation (NYSE:WAT). Millennium Management had $37.6 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $18.3 million position during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Thyra Zerhusen’s Fairpointe Capital, and Greg Eisner’s Engineers Gate Manager.

Let’s now take a look at hedge fund activity in other stocks similar to Waters Corporation (NYSE:WAT). We will take a look at Varian Medical Systems, Inc. (NYSE:VAR), Ubiquiti Inc. (NYSE:UI), SVB Financial Group (NASDAQ:SIVB), Jacobs Engineering Group Inc. (NYSE:J), UDR, Inc. (NYSE:UDR), CenturyLink, Inc. (NYSE:CTL), and E*TRADE Financial Corporation (NASDAQ:ETFC). This group of stocks’ market values are closest to WAT’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $695 million. That figure was $615 million in WAT’s case. E*TRADE Financial Corporation (NASDAQ:ETFC) is the most popular stock in this table. On the other hand SVB Financial Group (NASDAQ:SIVB) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Waters Corporation (NYSE:WAT) is more popular among hedge funds. Our overall hedge fund sentiment score for WAT is 90. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on WAT as the stock returned 19.9% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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