Were Hedge Funds Right About Williams-Sonoma, Inc. (WSM)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Williams-Sonoma, Inc. (NYSE:WSM) and determine whether hedge funds had an edge regarding this stock.

Williams-Sonoma, Inc. (NYSE:WSM) has seen a decrease in enthusiasm from smart money lately. Williams-Sonoma, Inc. (NYSE:WSM) was in 31 hedge funds’ portfolios at the end of September. The all time high for this statistic is 34. Our calculations also showed that WSM isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s take a glance at the fresh hedge fund action encompassing Williams-Sonoma, Inc. (NYSE:WSM).

Paul Marshall of Marshall Wace

Do Hedge Funds Think WSM Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the second quarter of 2021. The graph below displays the number of hedge funds with bullish position in WSM over the last 25 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Select Equity Group held the most valuable stake in Williams-Sonoma, Inc. (NYSE:WSM), which was worth $326.9 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $110.6 million worth of shares. AQR Capital Management, Sirios Capital Management, and ThornTree Capital Partners 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 Calixto Global Investors allocated the biggest weight to Williams-Sonoma, Inc. (NYSE:WSM), around 7.65% of its 13F portfolio. Sirios Capital Management is also relatively very bullish on the stock, designating 5.09 percent of its 13F equity portfolio to WSM.

Judging by the fact that Williams-Sonoma, Inc. (NYSE:WSM) has experienced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few funds who were dropping their full holdings heading into Q4. Intriguingly, Ken Griffin’s Citadel Investment Group sold off the largest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $46.3 million in stock. Renaissance Technologies, also dumped its stock, about $44.4 million worth. These moves are interesting, as total hedge fund interest dropped by 3 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Williams-Sonoma, Inc. (NYSE:WSM). These stocks are Advance Auto Parts, Inc. (NYSE:AAP), Packaging Corporation Of America (NYSE:PKG), Telefonica Brasil SA (NYSE:VIV), The J.M. Smucker Company (NYSE:SJM), W.R. Berkley Corporation (NYSE:WRB), Fidelity National Financial Inc (NYSE:FNF), and Lincoln National Corporation (NYSE:LNC). This group of stocks’ market caps resemble WSM’s market cap.

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As you can see these stocks had an average of 25.4 hedge funds with bullish positions and the average amount invested in these stocks was $635 million. That figure was $731 million in WSM’s case. Advance Auto Parts, Inc. (NYSE:AAP) is the most popular stock in this table. On the other hand Telefonica Brasil SA (NYSE:VIV) is the least popular one with only 5 bullish hedge fund positions. Williams-Sonoma, Inc. (NYSE:WSM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WSM is 72.7. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, WSM wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on WSM were disappointed as the stock returned -8.7% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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