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Did Hedge Funds Make The Right Call On Evoqua Water Technologies Corp. (AQUA) ?

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 Evoqua Water Technologies Corp. (NYSE:AQUA) and determine whether hedge funds had an edge regarding this stock.

Is Evoqua Water Technologies Corp. (NYSE:AQUA) a splendid investment today? Investors who are in the know were becoming more confident. The number of bullish hedge fund positions moved up by 7 lately. Our calculations also showed that AQUA 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.

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.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the new hedge fund action regarding Evoqua Water Technologies Corp. (NYSE:AQUA).

How are hedge funds trading Evoqua Water Technologies Corp. (NYSE:AQUA)?

At Q1’s end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in AQUA over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, P2 Capital Partners held the most valuable stake in Evoqua Water Technologies Corp. (NYSE:AQUA), which was worth $48.2 million at the end of the third quarter. On the second spot was Impax Asset Management which amassed $23 million worth of shares. Renaissance Technologies, Citadel Investment Group, and Marshall Wace LLP 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 P2 Capital Partners allocated the biggest weight to Evoqua Water Technologies Corp. (NYSE:AQUA), around 5.77% of its 13F portfolio. Pinz Capital is also relatively very bullish on the stock, setting aside 3.38 percent of its 13F equity portfolio to AQUA.

As industrywide interest jumped, some big names were breaking ground themselves. DSAM Partners, managed by Guy Shahar, initiated the most valuable position in Evoqua Water Technologies Corp. (NYSE:AQUA). DSAM Partners had $3.5 million invested in the company at the end of the quarter. Josh Donfeld and David Rogers’s Castle Hook Partners also made a $1.5 million investment in the stock during the quarter. The following funds were also among the new AQUA investors: Matthew L Pinz’s Pinz Capital, Simon Sadler’s Segantii Capital, and Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Evoqua Water Technologies Corp. (NYSE:AQUA) but similarly valued. These stocks are TowneBank (NASDAQ:TOWN), Four Corners Property Trust, Inc. (NYSE:FCPT), Sogou Inc. (NYSE:SOGO), and Cavco Industries, Inc. (NASDAQ:CVCO). This group of stocks’ market valuations are similar to AQUA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TOWN 4 25151 -2
FCPT 14 53932 -1
SOGO 6 9617 -5
CVCO 20 122025 0
Average 11 52681 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $125 million in AQUA’s case. Cavco Industries, Inc. (NASDAQ:CVCO) is the most popular stock in this table. On the other hand TowneBank (NASDAQ:TOWN) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Evoqua Water Technologies Corp. (NYSE:AQUA) 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 AQUA as the stock returned 65.9% 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.