Should You Avoid Waters Corporation (WAT)?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The one and a half month time period since the end of the third quarter is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by about 4 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Waters Corporation (NYSE:WAT).

Waters Corporation (NYSE:WAT) was in 23 hedge funds’ portfolios at the end of September. WAT shareholders have witnessed a decrease in hedge fund sentiment in recent months. There were 25 hedge funds in our database with WAT positions at the end of the previous quarter. Our calculations also showed that WAT isn’t among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

We’re going to take a look at the new hedge fund action regarding Waters Corporation (NYSE:WAT).

What does the smart money think about Waters Corporation (NYSE:WAT)?

At Q3’s end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in WAT heading into this year. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Renaissance Technologies, managed by Jim Simons, holds the biggest position in Waters Corporation (NYSE:WAT). Renaissance Technologies has a $179.9 million position in the stock, comprising 0.2% of its 13F portfolio. The second most bullish fund manager is Bares Capital Management, managed by Brian Bares, which holds a $175.1 million position; 4.9% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish contain David Blood and Al Gore’s Generation Investment Management, Robert Joseph Caruso’s Select Equity Group and Noam Gottesman’s GLG Partners.

Seeing as Waters Corporation (NYSE:WAT) has faced declining sentiment from hedge fund managers, logic holds that there exists a select few funds that decided to sell off their entire stakes in the third quarter. Intriguingly, Kevin Oram and Peter Uddo’s Praesidium Investment Management Company cut the largest investment of all the hedgies followed by Insider Monkey, worth about $33.5 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund sold off about $4.6 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 2 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks similar to Waters Corporation (NYSE:WAT). These stocks are CBRE Group, Inc. (NYSE:CBRE), Evergy, Inc. (NYSE:EVRG), Restaurant Brands International Inc (NYSE:QSR), and Avangrid, Inc. (NYSE:AGR). This group of stocks’ market caps are similar to WAT’s market cap.

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As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $1.88 billion. That figure was $837 million in WAT’s case. Restaurant Brands International Inc (NYSE:QSR) is the most popular stock in this table. On the other hand Avangrid, Inc. (NYSE:AGR) is the least popular one with only 18 bullish hedge fund positions. Waters Corporation (NYSE:WAT) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard QSR might be a better candidate to consider a long position.

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