Advanced Drainage Systems Inc. (WMS) Fell Out Of Favor With Hedge Funds

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 Advanced Drainage Systems Inc. (NYSE:WMS) and determine whether hedge funds had an edge regarding this stock.

Is Advanced Drainage Systems Inc. (NYSE:WMS) undervalued? The best stock pickers were reducing their bets on the stock. The number of long hedge fund bets dropped by 1 recently. Advanced Drainage Systems Inc. (NYSE:WMS) was in 24 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. Our calculations also showed that WMS 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). There were 25 hedge funds in our database with WMS positions at the end of the first quarter.

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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Millennium Management, Catapult Capital Management

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 look at the new hedge fund action surrounding Advanced Drainage Systems Inc. (NYSE:WMS).

How have hedgies been trading Advanced Drainage Systems Inc. (NYSE:WMS)?

At second quarter’s end, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in WMS over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is WMS A Good Stock To Buy?

More specifically, Stockbridge Partners was the largest shareholder of Advanced Drainage Systems Inc. (NYSE:WMS), with a stake worth $201.7 million reported as of the end of September. Trailing Stockbridge Partners was Impax Asset Management, which amassed a stake valued at $155 million. MIG Capital, Renaissance Technologies, and Impactive 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 Impactive Capital allocated the biggest weight to Advanced Drainage Systems Inc. (NYSE:WMS), around 10.7% of its 13F portfolio. Stockbridge Partners is also relatively very bullish on the stock, earmarking 6.33 percent of its 13F equity portfolio to WMS.

Due to the fact that Advanced Drainage Systems Inc. (NYSE:WMS) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there was a specific group of fund managers who sold off their positions entirely heading into Q3. Intriguingly, Richard S. Meisenberg’s ACK Asset Management dropped the biggest position of the “upper crust” of funds tracked by Insider Monkey, totaling about $6.2 million in stock. Ben Gordon’s fund, Blue Grotto Capital, also dumped its stock, about $2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to Advanced Drainage Systems Inc. (NYSE:WMS). We will take a look at Lithia Motors Inc (NYSE:LAD), Virgin Galactic Holdings, Inc. (NYSE:SPCE), Stantec Inc. (NYSE:STN), Fox Factory Holding Corp (NASDAQ:FOXF), Axis Capital Holdings Limited (NYSE:AXS), The Timken Company (NYSE:TKR), and Strategic Education Inc (NASDAQ:STRA). This group of stocks’ market values match WMS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LAD 31 761672 4
SPCE 22 60327 10
STN 5 47552 -7
FOXF 13 132172 3
AXS 35 661585 3
TKR 31 302095 1
STRA 21 274084 8
Average 22.6 319927 3.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.6 hedge funds with bullish positions and the average amount invested in these stocks was $320 million. That figure was $583 million in WMS’s case. Axis Capital Holdings Limited (NYSE:AXS) is the most popular stock in this table. On the other hand Stantec Inc. (NYSE:STN) is the least popular one with only 5 bullish hedge fund positions. Advanced Drainage Systems Inc. (NYSE:WMS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WMS is 62.3. 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 gained 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. Hedge funds were also right about betting on WMS as the stock returned 17.4% during Q3 (through September 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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