2019 Review: Most Favored Hedge Fund Stocks vs. WEX Inc (WEX)

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by more than 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

WEX Inc (NYSE:WEX) was in 25 hedge funds’ portfolios at the end of the third quarter of 2019. WEX has experienced a decrease in enthusiasm from smart money recently. There were 31 hedge funds in our database with WEX positions at the end of the previous quarter. Our calculations also showed that WEX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Paul Reeder PAR Capital Management

Paul Reeder of PAR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s view the recent hedge fund action surrounding WEX Inc (NYSE:WEX).

Hedge fund activity in WEX Inc (NYSE:WEX)

Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in WEX over the last 17 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

More specifically, PAR Capital Management was the largest shareholder of WEX Inc (NYSE:WEX), with a stake worth $146.5 million reported as of the end of September. Trailing PAR Capital Management was Echo Street Capital Management, which amassed a stake valued at $94.6 million. Balyasny Asset Management, Columbus Circle Investors, and Carlson Capital 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 BlueMar Capital Management allocated the biggest weight to WEX Inc (NYSE:WEX), around 4.84% of its 13F portfolio. Prana Capital Management is also relatively very bullish on the stock, designating 2.69 percent of its 13F equity portfolio to WEX.

Since WEX Inc (NYSE:WEX) has experienced a decline in interest from the aggregate hedge fund industry, we can see that there were a few fund managers that elected to cut their positions entirely by the end of the third quarter. Intriguingly, Louis Bacon’s Moore Global Investments sold off the biggest position of all the hedgies tracked by Insider Monkey, comprising about $41.6 million in stock, and James Parsons’s Junto Capital Management was right behind this move, as the fund sold off about $41.1 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 6 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as WEX Inc (NYSE:WEX) but similarly valued. We will take a look at Medical Properties Trust, Inc. (NYSE:MPW), Qorvo Inc (NASDAQ:QRVO), The Carlyle Group Inc. (NASDAQ:CG), and Service Corporation International (NYSE:SCI). This group of stocks’ market valuations are closest to WEX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MPW 12 241800 -1
QRVO 35 1240574 7
CG 7 201850 0
SCI 20 352282 5
Average 18.5 509127 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $509 million. That figure was $474 million in WEX’s case. Qorvo Inc (NASDAQ:QRVO) is the most popular stock in this table. On the other hand The Carlyle Group Inc. (NASDAQ:CG) is the least popular one with only 7 bullish hedge fund positions. WEX Inc (NYSE:WEX) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on WEX as the stock returned 49.6% in 2019 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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