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Did Hedge Funds Make The Right Call On Waddell & Reed Financial, Inc. (WDR) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Waddell & Reed Financial, Inc. (NYSE:WDR) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Waddell & Reed Financial, Inc. (NYSE:WDR) ready to rally soon? Prominent investors were in a bullish mood. The number of bullish hedge fund bets rose by 1 in recent months. Our calculations also showed that WDR 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Donald Yacktman of Yacktman Asset 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. Now we’re going to analyze the fresh hedge fund action encompassing Waddell & Reed Financial, Inc. (NYSE:WDR).

How have hedgies been trading Waddell & Reed Financial, Inc. (NYSE:WDR)?

Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in WDR over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

More specifically, GAMCO Investors was the largest shareholder of Waddell & Reed Financial, Inc. (NYSE:WDR), with a stake worth $15.7 million reported as of the end of September. Trailing GAMCO Investors was Fisher Asset Management, which amassed a stake valued at $13.9 million. Arrowstreet Capital, GMT Capital, and Yacktman Asset Management 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 Factorial Partners allocated the biggest weight to Waddell & Reed Financial, Inc. (NYSE:WDR), around 1.16% of its 13F portfolio. Invenomic Capital Management is also relatively very bullish on the stock, setting aside 0.39 percent of its 13F equity portfolio to WDR.

As industrywide interest jumped, key money managers have jumped into Waddell & Reed Financial, Inc. (NYSE:WDR) headfirst. GMT Capital, managed by Thomas E. Claugus, initiated the most valuable position in Waddell & Reed Financial, Inc. (NYSE:WDR). GMT Capital had $6.7 million invested in the company at the end of the quarter. Donald Yacktman’s Yacktman Asset Management also made a $5.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Gregg Moskowitz’s Interval Partners, Greg Eisner’s Engineers Gate Manager, and Ali Motamed’s Invenomic Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Waddell & Reed Financial, Inc. (NYSE:WDR) but similarly valued. We will take a look at Newmark Group, Inc. (NASDAQ:NMRK), Saul Centers Inc (NYSE:BFS), Raven Industries, Inc. (NASDAQ:RAVN), and Teekay LNG Partners L.P. (NYSE:TGP). This group of stocks’ market valuations are closest to WDR’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NMRK 24 66647 1
BFS 7 25019 -1
RAVN 11 73375 -2
TGP 10 38247 -3
Average 13 50822 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $51 million. That figure was $74 million in WDR’s case. Newmark Group, Inc. (NASDAQ:NMRK) is the most popular stock in this table. On the other hand Saul Centers Inc (NYSE:BFS) is the least popular one with only 7 bullish hedge fund positions. Waddell & Reed Financial, Inc. (NYSE:WDR) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on WDR as the stock returned 39.3% in Q2 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.