The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Select Energy Services, Inc. (NYSE:WTTR), and what that likely means for the prospects of the company and its stock.
Is Select Energy Services, Inc. (NYSE:WTTR) worth your attention right now? Prominent investors are in a bullish mood. The number of bullish hedge fund bets went up by 3 lately. Our calculations also showed that WTTR isn’t among the 30 most popular stocks among hedge funds. WTTR was in 14 hedge funds’ portfolios at the end of September. There were 11 hedge funds in our database with WTTR holdings at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
We’re going to analyze the recent hedge fund action regarding Select Energy Services, Inc. (NYSE:WTTR).
How are hedge funds trading Select Energy Services, Inc. (NYSE:WTTR)?
At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 27% from the second quarter of 2018. By comparison, 13 hedge funds held shares or bullish call options in WTTR heading into this year. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Mariko Gordon’s Daruma Asset Management has the biggest position in Select Energy Services, Inc. (NYSE:WTTR), worth close to $28.3 million, comprising 2.7% of its total 13F portfolio. Coming in second is Adage Capital Management, led by Phill Gross and Robert Atchinson, holding a $27.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other peers that are bullish encompass Till Bechtolsheimer’s Arosa Capital Management, Daniel Arbess’s Perella Weinberg Partners and Jonathan Barrett and Paul Segal’s Luminus Management.
Consequently, specific money managers were leading the bulls’ herd. Point72 Asset Management, managed by Steve Cohen, initiated the most valuable position in Select Energy Services, Inc. (NYSE:WTTR). Point72 Asset Management had $2.1 million invested in the company at the end of the quarter. Mike Vranos’s Ellington also initiated a $0.3 million position during the quarter. The other funds with brand new WTTR positions are Alec Litowitz and Ross Laser’s Magnetar Capital and Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Select Energy Services, Inc. (NYSE:WTTR) but similarly valued. These stocks are SJW Corp. (NYSE:SJW), Tailored Brands, Inc. (NYSE:TLRD), ArcBest Corp (NASDAQ:ARCB), and Endocyte, Inc. (NASDAQ:ECYT). This group of stocks’ market valuations are closest to WTTR’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $200 million. That figure was $104 million in WTTR’s case. Endocyte, Inc. (NASDAQ:ECYT) is the most popular stock in this table. On the other hand SJW Corp. (NYSE:SJW) is the least popular one with only 11 bullish hedge fund positions. Select Energy Services, Inc. (NYSE:WTTR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ECYT might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.