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

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of WEX Inc (NYSE:WEX) based on that data and determine whether they were really smart about the stock.

Is WEX Inc (NYSE:WEX) going to take off soon? The smart money was becoming hopeful. The number of bullish hedge fund bets increased by 10 recently. Our calculations also showed that WEX 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.

GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

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. With all of this in mind let’s analyze the key hedge fund action regarding WEX Inc (NYSE:WEX).

How have hedgies been trading WEX Inc (NYSE:WEX)?

At Q1’s end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 40% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in WEX over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Among these funds, PAR Capital Management held the most valuable stake in WEX Inc (NYSE:WEX), which was worth $83.6 million at the end of the third quarter. On the second spot was Echo Street Capital Management which amassed $63 million worth of shares. Steadfast Capital Management, Balyasny Asset Management, and Palestra 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 PAR Capital Management allocated the biggest weight to WEX Inc (NYSE:WEX), around 3.55% of its 13F portfolio. Red Cedar Management is also relatively very bullish on the stock, earmarking 3.04 percent of its 13F equity portfolio to WEX.

Consequently, some big names have jumped into WEX Inc (NYSE:WEX) headfirst. Steadfast Capital Management, managed by Robert Pitts, initiated the most valuable position in WEX Inc (NYSE:WEX). Steadfast Capital Management had $53.1 million invested in the company at the end of the quarter. Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management also made a $30.8 million investment in the stock during the quarter. The following funds were also among the new WEX investors: Leon Shaulov’s Maplelane Capital, Joel Greenblatt’s Gotham Asset Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as WEX Inc (NYSE:WEX) but similarly valued. These stocks are Momo Inc (NASDAQ:MOMO), Pilgrim’s Pride Corporation (NASDAQ:PPC), Woori Financial Group Inc. (NYSE:WF), and Quanta Services Inc (NYSE:PWR). This group of stocks’ market valuations match WEX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MOMO 25 585481 -13
PPC 18 122135 -6
WF 3 2382 0
PWR 28 1509183 -16
Average 18.5 554795 -8.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $555 million. That figure was $355 million in WEX’s case. Quanta Services Inc (NYSE:PWR) is the most popular stock in this table. On the other hand Woori Financial Group Inc. (NYSE:WF) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks WEX Inc (NYSE:WEX) 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 WEX as the stock returned 57.8% 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.