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Hedge Funds Are Cashing Out Of Watsco Inc (WSO)

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Watsco Inc (NYSE:WSO).

Watsco Inc (NYSE:WSO) has seen a decrease in support from the world’s most elite money managers of late. WSO was in 18 hedge funds’ portfolios at the end of September. There were 22 hedge funds in our database with WSO holdings 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 Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Clint Carlson of Carlson Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to review the key hedge fund action regarding Watsco Inc (NYSE:WSO).

Hedge fund activity in Watsco Inc (NYSE:WSO)

Heading into the fourth quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WSO over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

More specifically, Markel Gayner Asset Management was the largest shareholder of Watsco Inc (NYSE:WSO), with a stake worth $63.7 million reported as of the end of September. Trailing Markel Gayner Asset Management was Carlson Capital, which amassed a stake valued at $28.9 million. Millennium Management, Balyasny Asset Management, and Royce & Associates 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 Markel Gayner Asset Management allocated the biggest weight to Watsco Inc (NYSE:WSO), around 0.96% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, designating 0.52 percent of its 13F equity portfolio to WSO.

Due to the fact that Watsco Inc (NYSE:WSO) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few funds that decided to sell off their full holdings in the third quarter. At the top of the heap, Alexander Mitchell’s Scopus Asset Management dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, totaling close to $6.5 million in stock. Ken Griffin’s fund, Citadel Investment Group, also dropped its stock, about $5.6 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Watsco Inc (NYSE:WSO) but similarly valued. These stocks are HubSpot Inc (NYSE:HUBS), Momo Inc (NASDAQ:MOMO), Israel Chemicals Ltd. (NYSE:ICL), and Sealed Air Corporation (NYSE:SEE). This group of stocks’ market valuations match WSO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HUBS 34 820740 1
MOMO 27 827296 5
ICL 5 21431 -1
SEE 32 950679 5
Average 24.5 655037 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $655 million. That figure was $139 million in WSO’s case. HubSpot Inc (NYSE:HUBS) is the most popular stock in this table. On the other hand Israel Chemicals Ltd. (NYSE:ICL) is the least popular one with only 5 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on WSO, though not to the same extent, as the stock returned 6.2% during the first two months of the fourth quarter and outperformed the market.

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

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