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 Cactus, Inc. (NYSE:WHD).
Cactus, Inc. (NYSE:WHD) shareholders have witnessed a decrease in hedge fund sentiment of late. Our calculations also showed that WHD 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.
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 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. 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.
Paul Marshall of Marshall Wace
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds‘ buy/sell signals. We’re going to analyze the new hedge fund action encompassing Cactus, Inc. (NYSE:WHD).
How are hedge funds trading Cactus, Inc. (NYSE:WHD)?
Heading into the fourth quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WHD over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Ken Griffin’s Citadel Investment Group has the biggest position in Cactus, Inc. (NYSE:WHD), worth close to $43.9 million, amounting to less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Encompass Capital Advisors, led by Todd J. Kantor, holding a $34.9 million position; 2.4% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that are bullish encompass Till Bechtolsheimer’s Arosa Capital Management, Phill Gross and Robert Atchinson’s Adage Capital Management and Paul Marshall and Ian Wace’s Marshall Wace. In terms of the portfolio weights assigned to each position Arosa Capital Management allocated the biggest weight to Cactus, Inc. (NYSE:WHD), around 2.68% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, designating 2.39 percent of its 13F equity portfolio to WHD.
Due to the fact that Cactus, Inc. (NYSE:WHD) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there were a few funds that decided to sell off their full holdings heading into Q4. Intriguingly, Perella Weinberg Partners cut the largest investment of the “upper crust” of funds followed by Insider Monkey, worth about $16.3 million in stock. Steve Cohen’s fund, Point72 Asset Management, also cut its stock, about $5.3 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 6 funds heading into Q4.
Let’s check out hedge fund activity in other stocks similar to Cactus, Inc. (NYSE:WHD). We will take a look at Intercept Pharmaceuticals Inc (NASDAQ:ICPT), First Bancorp (NYSE:FBP), PagerDuty, Inc. (NYSE:PD), and ProAssurance Corporation (NYSE:PRA). This group of stocks’ market valuations match WHD’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ICPT | 21 | 245421 | -3 |
| FBP | 21 | 198063 | -2 |
| PD | 11 | 15240 | -11 |
| PRA | 15 | 203495 | 0 |
| Average | 17 | 165555 | -4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $166 million. That figure was $160 million in WHD’s case. Intercept Pharmaceuticals Inc (NASDAQ:ICPT) is the most popular stock in this table. On the other hand PagerDuty, Inc. (NYSE:PD) is the least popular one with only 11 bullish hedge fund positions. Cactus, Inc. (NYSE:WHD) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WHD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WHD were disappointed as the stock returned 4.6% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
