Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Walker & Dunlop Inc. (NYSE:WD) changed recently.
Hedge fund interest in Walker & Dunlop Inc. (NYSE:WD) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Installed Building Products Inc (NYSE:IBP), Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), and CSG Systems International, Inc. (NASDAQ:CSGS) to gather more data points. Our calculations also showed that WD 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.
Bill Miller of Miller Value Partners
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. Let’s view the key hedge fund action regarding Walker & Dunlop Inc. (NYSE:WD).
How are hedge funds trading Walker & Dunlop Inc. (NYSE:WD)?
At Q3’s end, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in WD a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Chuck Royce’s Royce & Associates has the biggest position in Walker & Dunlop Inc. (NYSE:WD), worth close to $16.2 million, accounting for 0.2% of its total 13F portfolio. The second largest stake is held by Anand Parekh of Alyeska Investment Group, with a $12.3 million position; 0.2% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions contain Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Bill Miller’s Miller Value Partners and George Baxter’s Sabrepoint Capital. In terms of the portfolio weights assigned to each position Sabrepoint Capital allocated the biggest weight to Walker & Dunlop Inc. (NYSE:WD), around 3.62% of its 13F portfolio. Miller Value Partners is also relatively very bullish on the stock, designating 0.33 percent of its 13F equity portfolio to WD.
Since Walker & Dunlop Inc. (NYSE:WD) has experienced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of funds that slashed their positions entirely heading into Q4. Intriguingly, Keith M. Rosenbloom’s Cruiser Capital Advisors sold off the biggest investment of the 750 funds tracked by Insider Monkey, totaling close to $1.3 million in stock. Thomas Bailard’s fund, Bailard Inc, also said goodbye to its stock, about $0.3 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s also examine hedge fund activity in other stocks similar to Walker & Dunlop Inc. (NYSE:WD). We will take a look at Installed Building Products Inc (NYSE:IBP), Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH), CSG Systems International, Inc. (NASDAQ:CSGS), and Group 1 Automotive, Inc. (NYSE:GPI). All of these stocks’ market caps resemble WD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IBP | 20 | 189032 | 7 |
| DCPH | 26 | 542998 | 11 |
| CSGS | 19 | 221276 | 1 |
| GPI | 20 | 171213 | 7 |
| Average | 21.25 | 281130 | 6.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $281 million. That figure was $72 million in WD’s case. Deciphera Pharmaceuticals, Inc. (NASDAQ:DCPH) is the most popular stock in this table. On the other hand CSG Systems International, Inc. (NASDAQ:CSGS) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Walker & Dunlop Inc. (NYSE:WD) is even less popular than CSGS. Hedge funds clearly dropped the ball on WD as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 WD as the stock returned 17.9% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
