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Did Hedge Funds Make The Right Call On Advanced Drainage Systems Inc. (WMS) ?

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.

Hedge fund interest in Advanced Drainage Systems Inc. (NYSE:WMS) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Washington Federal Inc. (NASDAQ:WAFD), Fabrinet (NYSE:FN), and Select Medical Holdings Corporation (NYSE:SEM) to gather more data points. Our calculations also showed that WMS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

If you’d ask most investors, hedge funds are perceived as unimportant, outdated financial vehicles of the past. While there are more than 8000 funds in operation today, Our experts hone in on the moguls of this club, around 850 funds. These hedge fund managers direct bulk of all hedge funds’ total capital, and by following their top stock picks, Insider Monkey has figured out various investment strategies that have historically defeated the market. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Phill Gross of Adage Capital 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s take a glance at the fresh hedge fund action surrounding Advanced Drainage Systems Inc. (NYSE:WMS).

What have hedge funds been doing with Advanced Drainage Systems Inc. (NYSE:WMS)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2019. By comparison, 17 hedge funds held shares or bullish call options in WMS a year ago. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Sharlyn C. Heslam’s Stockbridge Partners has the largest position in Advanced Drainage Systems Inc. (NYSE:WMS), worth close to $120.2 million, comprising 4.8% of its total 13F portfolio. On Stockbridge Partners’s heels is Impax Asset Management, led by Ian Simm, holding a $87.7 million position; 1.2% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism contain Richard Merage’s MIG Capital, Lauren Taylor Wolfe’s Impactive Capital and Renaissance Technologies. In terms of the portfolio weights assigned to each position Impactive Capital allocated the biggest weight to Advanced Drainage Systems Inc. (NYSE:WMS), around 12.16% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, dishing out 5.18 percent of its 13F equity portfolio to WMS.

Seeing as Advanced Drainage Systems Inc. (NYSE:WMS) has witnessed a decline in interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedge funds that slashed their full holdings heading into Q4. Intriguingly, Will Cook’s Sunriver Management cut the biggest position of all the hedgies monitored by Insider Monkey, totaling close to $18.3 million in stock, and Matthew Iorio’s White Elm Capital was right behind this move, as the fund cut about $6.3 million worth. These transactions are interesting, as total 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 Advanced Drainage Systems Inc. (NYSE:WMS) but similarly valued. These stocks are Washington Federal Inc. (NASDAQ:WAFD), Fabrinet (NYSE:FN), Select Medical Holdings Corporation (NYSE:SEM), and TC Pipelines, LP (NYSE:TCP). This group of stocks’ market caps are closest to WMS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WAFD 18 42649 -1
FN 22 132983 -3
SEM 18 106537 -3
TCP 2 9665 -1
Average 15 72959 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $73 million. That figure was $369 million in WMS’s case. Fabrinet (NYSE:FN) is the most popular stock in this table. On the other hand TC Pipelines, LP (NYSE:TCP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Advanced Drainage Systems Inc. (NYSE:WMS) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on WMS as the stock returned 68.1% in Q2 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.

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