Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Watts Water Technologies Inc (NYSE:WTS)? The smart money sentiment can provide an answer to this question.
Is Watts Water Technologies Inc (NYSE:WTS) going to take off soon? Money managers are reducing their bets on the stock. The number of long hedge fund bets were cut by 2 recently. Our calculations also showed that wts isn’t among the 30 most popular stocks among hedge funds. WTS was in 15 hedge funds’ portfolios at the end of the first quarter of 2019. There were 17 hedge funds in our database with WTS holdings at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
We’re going to go over the key hedge fund action encompassing Watts Water Technologies Inc (NYSE:WTS).
Hedge fund activity in Watts Water Technologies Inc (NYSE:WTS)
Heading into the second quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in WTS over the last 15 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Watts Water Technologies Inc (NYSE:WTS) was held by Impax Asset Management, which reported holding $192.1 million worth of stock at the end of March. It was followed by GAMCO Investors with a $93 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Royce & Associates.
Judging by the fact that Watts Water Technologies Inc (NYSE:WTS) has faced declining sentiment from the smart money, it’s safe to say that there were a few fund managers who were dropping their full holdings last quarter. It’s worth mentioning that Minhua Zhang’s Weld Capital Management dropped the biggest position of the 700 funds followed by Insider Monkey, totaling close to $1.1 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund dropped about $0.4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 2 funds last quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Watts Water Technologies Inc (NYSE:WTS) but similarly valued. These stocks are Texas Capital Bancshares Inc (NASDAQ:TCBI), TC Pipelines, LP (NYSE:TCP), Finisar Corporation (NASDAQ:FNSR), and Cathay General Bancorp (NASDAQ:CATY). All of these stocks’ market caps resemble WTS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TCBI | 19 | 203042 | -7 |
| TCP | 5 | 13897 | 3 |
| FNSR | 14 | 406380 | 1 |
| CATY | 14 | 39293 | 0 |
| Average | 13 | 165653 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $166 million. That figure was $331 million in WTS’s case. Texas Capital Bancshares Inc (NASDAQ:TCBI) is the most popular stock in this table. On the other hand TC Pipelines, LP (NYSE:TCP) is the least popular one with only 5 bullish hedge fund positions. Watts Water Technologies Inc (NYSE:WTS) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Hedge funds were also right about betting on WTS as the stock returned 11.4% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
