Should You Avoid World Acceptance Corp. (WRLD)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtWorld Acceptance Corp. (NASDAQ:WRLD) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is World Acceptance Corp. (NASDAQ:WRLD) undervalued? Investors who are in the know were taking a bearish view. The number of bullish hedge fund positions retreated by 1 in recent months. Our calculations also showed that WRLD isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). WRLD was in 13 hedge funds’ portfolios at the end of March. There were 14 hedge funds in our database with WRLD holdings at the end of the previous quarter.

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 58 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 7 most expensive cigarette brands to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s view the latest hedge fund action encompassing World Acceptance Corp. (NASDAQ:WRLD).

How have hedgies been trading World Acceptance Corp. (NASDAQ:WRLD)?

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in WRLD over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Clifford A. Sosin’s CAS Investment Partners has the largest position in World Acceptance Corp. (NASDAQ:WRLD), worth close to $38.4 million, accounting for 8.4% of its total 13F portfolio. On CAS Investment Partners’s heels is Nantahala Capital Management, led by Wilmot B. Harkey and Daniel Mack, holding a $20 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish contain Andrew Bellas’s General Equity Partners, Renaissance Technologies and Edward Goodnow’s Goodnow Investment Group. In terms of the portfolio weights assigned to each position General Equity Partners allocated the biggest weight to World Acceptance Corp. (NASDAQ:WRLD), around 11.42% of its 13F portfolio. CAS Investment Partners is also relatively very bullish on the stock, designating 8.44 percent of its 13F equity portfolio to WRLD.

Judging by the fact that World Acceptance Corp. (NASDAQ:WRLD) has experienced a decline in interest from the smart money, logic holds that there lies a certain “tier” of money managers who were dropping their positions entirely last quarter. Interestingly, James Thomas Berylson’s Berylson Capital Partners dropped the largest position of the “upper crust” of funds monitored by Insider Monkey, totaling about $5 million in stock. Ken Griffin’s fund, Citadel Investment Group, also cut its stock, about $1.8 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as World Acceptance Corp. (NASDAQ:WRLD) but similarly valued. We will take a look at Horizon Bancorp (NASDAQ:HBNC), Viad Corp (NYSE:VVI), Ribbon Communications Inc. (NASDAQ:RBBN), and MTS Systems Corporation (NASDAQ:MTSC). This group of stocks’ market caps are similar to WRLD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $101 million in WRLD’s case. Viad Corp (NYSE:VVI) is the most popular stock in this table. On the other hand Horizon Bancorp (NASDAQ:HBNC) is the least popular one with only 11 bullish hedge fund positions. World Acceptance Corp. (NASDAQ:WRLD) is not the most popular stock in this group but hedge fund interest is still above average. 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 gained 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on WRLD, though not to the same extent, as the stock returned 22.8% during the first two months and twenty five days of the second quarter and outperformed the market as well.

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