Reputable billionaire investors such as Nelson Peltz and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
Waddell & Reed Financial, Inc. (NYSE:WDR) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 17 hedge funds’ portfolios at the end of the third quarter of 2018. At the end of this article we will also compare WDR to other stocks including Wageworks Inc (NYSE:WAGE), AAR Corp. (NYSE:AIR), and Acacia Communications, Inc. (NASDAQ:ACIA) to get a better sense of its popularity.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 6.3% year to date (through December 3rd) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 18 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Let’s take a gander at the latest hedge fund action regarding Waddell & Reed Financial, Inc. (NYSE:WDR).
Hedge fund activity in Waddell & Reed Financial, Inc. (NYSE:WDR)
At Q3’s end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in WDR heading into this year. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
More specifically, Fisher Asset Management was the largest shareholder of Waddell & Reed Financial, Inc. (NYSE:WDR), with a stake worth $38.5 million reported as of the end of September. Trailing Fisher Asset Management was GAMCO Investors, which amassed a stake valued at $34.9 million. Citadel Investment Group, Two Sigma Advisors, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that Waddell & Reed Financial, Inc. (NYSE:WDR) has faced declining sentiment from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedge funds that decided to sell off their full holdings last quarter. At the top of the heap, Gregg Moskowitz’s Interval Partners sold off the biggest investment of all the hedgies tracked by Insider Monkey, valued at close to $1.2 million in stock, and Paul Tudor Jones’s Tudor Investment Corp was right behind this move, as the fund dumped about $0.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Waddell & Reed Financial, Inc. (NYSE:WDR) but similarly valued. We will take a look at Wageworks Inc (NYSE:WAGE), AAR Corp. (NYSE:AIR), Acacia Communications, Inc. (NASDAQ:ACIA), and NBT Bancorp Inc. (NASDAQ:NBTB). This group of stocks’ market values match WDR’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WAGE | 12 | 55256 | -1 |
| AIR | 22 | 121956 | 6 |
| ACIA | 17 | 64336 | 6 |
| NBTB | 8 | 11663 | -1 |
| Average | 14.75 | 63303 | 2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $146 million in WDR’s case. AAR Corp. (NYSE:AIR) is the most popular stock in this table. On the other hand NBT Bancorp Inc. (NASDAQ:NBTB) is the least popular one with only 8 bullish hedge fund positions. Waddell & Reed Financial, Inc. (NYSE:WDR) 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. In this regard AIR might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
