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Did Hedge Funds Make The Right Call On Williams-Sonoma, Inc. (WSM) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Williams-Sonoma, Inc. (NYSE:WSM) and determine whether hedge funds skillfully traded this stock.

Williams-Sonoma, Inc. (NYSE:WSM) was in 26 hedge funds’ portfolios at the end of the first quarter of 2020. WSM shareholders have witnessed a decrease in hedge fund sentiment lately. There were 29 hedge funds in our database with WSM positions at the end of the previous quarter. Our calculations also showed that WSM 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. Now we’re going to view the fresh hedge fund action surrounding Williams-Sonoma, Inc. (NYSE:WSM).

Hedge fund activity in Williams-Sonoma, Inc. (NYSE:WSM)

Heading into the second quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 29 hedge funds with a bullish position in WSM a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Cliff Asness’s AQR Capital Management has the biggest position in Williams-Sonoma, Inc. (NYSE:WSM), worth close to $52.5 million, corresponding to 0.1% of its total 13F portfolio. The second most bullish fund manager is Dmitry Balyasny of Balyasny Asset Management, with a $23.4 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish consist of Renaissance Technologies, Robert Joseph Caruso’s Select Equity Group and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Neo Ivy Capital allocated the biggest weight to Williams-Sonoma, Inc. (NYSE:WSM), around 0.53% of its 13F portfolio. Cinctive Capital Management is also relatively very bullish on the stock, earmarking 0.31 percent of its 13F equity portfolio to WSM.

Because Williams-Sonoma, Inc. (NYSE:WSM) has faced bearish sentiment from hedge fund managers, it’s safe to say that there lies a certain “tier” of fund managers who sold off their full holdings heading into Q4. Intriguingly, James Parsons’s Junto Capital Management sold off the largest investment of the 750 funds followed by Insider Monkey, worth about $54.5 million in stock. Steven Boyd’s fund, Armistice Capital, also sold off its stock, about $32.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Williams-Sonoma, Inc. (NYSE:WSM). We will take a look at Floor & Decor Holdings, Inc. (NYSE:FND), Empire State Realty Trust Inc (NYSE:ESRT), Seaboard Corporation (NYSE:SEB), and Littelfuse, Inc. (NASDAQ:LFUS). This group of stocks’ market caps resemble WSM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FND 23 400020 -4
ESRT 16 151926 -2
SEB 15 108625 -3
LFUS 22 218011 1
Average 19 219646 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $220 million. That figure was $182 million in WSM’s case. Floor & Decor Holdings, Inc. (NYSE:FND) is the most popular stock in this table. On the other hand Seaboard Corporation (NYSE:SEB) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Williams-Sonoma, Inc. (NYSE:WSM) 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 WSM as the stock returned 94.6% 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.