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Did Hedge Funds Make The Right Call On Watsco Inc (WSO) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtWatsco Inc (NYSE:WSO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Watsco Inc (NYSE:WSO) shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. WSO was in 20 hedge funds’ portfolios at the end of March. There were 23 hedge funds in our database with WSO positions at the end of the previous quarter. Our calculations also showed that WSO 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s take a peek at the new hedge fund action surrounding Watsco Inc (NYSE:WSO).

How are hedge funds trading Watsco Inc (NYSE:WSO)?

At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from the fourth quarter of 2019. By comparison, 18 hedge funds held shares or bullish call options in WSO a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Markel Gayner Asset Management held the most valuable stake in Watsco Inc (NYSE:WSO), which was worth $62.7 million at the end of the third quarter. On the second spot was Carlson Capital which amassed $47.5 million worth of shares. Motley Fool Asset Management, Renaissance Technologies, and Winton Capital 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 Motley Fool Asset Management allocated the biggest weight to Watsco Inc (NYSE:WSO), around 3.54% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, setting aside 1.25 percent of its 13F equity portfolio to WSO.

Seeing as Watsco Inc (NYSE:WSO) has experienced declining sentiment from hedge fund managers, logic holds that there is a sect of hedgies that decided to sell off their full holdings last quarter. Interestingly, Michael Gelband’s ExodusPoint Capital dropped the largest investment of the “upper crust” of funds watched by Insider Monkey, valued at an estimated $0.9 million in stock. Qing Li’s fund, Sciencast Management, also dumped its stock, about $0.8 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Watsco Inc (NYSE:WSO). We will take a look at StoneCo Ltd. (NASDAQ:STNE), Fortune Brands Home & Security Inc (NYSE:FBHS), Halliburton Company (NYSE:HAL), and Entegris Inc (NASDAQ:ENTG). This group of stocks’ market valuations are similar to WSO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
STNE 34 615449 5
FBHS 31 640066 -3
HAL 32 513523 1
ENTG 19 488063 -5
Average 29 564275 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $564 million. That figure was $174 million in WSO’s case. StoneCo Ltd. (NASDAQ:STNE) is the most popular stock in this table. On the other hand Entegris Inc (NASDAQ:ENTG) is the least popular one with only 19 bullish hedge fund positions. Watsco Inc (NYSE:WSO) is not the least popular stock in this group but hedge fund interest is still below 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on WSO as the stock returned 47.7% since the end of March and outperformed the market by an even larger margin.

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