Were Hedge Funds Right About Crowding Into Waters Corporation (WAT)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Waters Corporation (NYSE:WAT).

Waters Corporation (NYSE:WAT) investors should pay attention to an increase in enthusiasm from smart money recently. Waters Corporation (NYSE:WAT) was in 38 hedge funds’ portfolios at the end of June. The all time high for this statistics is 32. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 25 hedge funds in our database with WAT positions at the end of the first quarter. Our calculations also showed that WAT isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 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.

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a gander at the latest hedge fund action surrounding Waters Corporation (NYSE:WAT).

How have hedgies been trading Waters Corporation (NYSE:WAT)?

At second quarter’s end, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of 52% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in WAT a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D E Shaw held the most valuable stake in Waters Corporation (NYSE:WAT), which was worth $83.6 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $82.8 million worth of shares. Impax Asset Management, Select Equity Group, and Generation Investment Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Fairpointe Capital allocated the biggest weight to Waters Corporation (NYSE:WAT), around 1.39% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, earmarking 1.12 percent of its 13F equity portfolio to WAT.

As aggregate interest increased, some big names have been driving this bullishness. Millennium Management, managed by Israel Englander, established the largest position in Waters Corporation (NYSE:WAT). Millennium Management had $37.6 million invested in the company at the end of the quarter. Renaissance Technologies also made a $18.3 million investment in the stock during the quarter. The following funds were also among the new WAT investors: Donald Sussman’s Paloma Partners, Thyra Zerhusen’s Fairpointe Capital, and Greg Eisner’s Engineers Gate Manager.

Let’s go over hedge fund activity in other stocks similar to Waters Corporation (NYSE:WAT). We will take a look at Varian Medical Systems, Inc. (NYSE:VAR), Ubiquiti Inc. (NYSE:UI), SVB Financial Group (NASDAQ:SIVB), Jacobs Engineering Group Inc. (NYSE:J), UDR, Inc. (NYSE:UDR), Lumen Technologies, Inc. (NYSE:CTL), and E*TRADE Financial Corporation, LLC (NASDAQ:ETFC). This group of stocks’ market valuations resemble WAT’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $695 million. That figure was $615 million in WAT’s case. E*TRADE Financial Corporation, LLC (NASDAQ:ETFC) is the most popular stock in this table. On the other hand SVB Financial Group (NASDAQ:SIVB) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Waters Corporation (NYSE:WAT) is more popular among hedge funds. Our overall hedge fund sentiment score for WAT is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 returned 23% in 2020 through October 30th but still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on WAT as the stock returned 23.5% since the end of June (through 10/30) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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