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Hedge Funds Are Done Buying Waddell & Reed Financial, Inc. (WDR)?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Waddell & Reed Financial, Inc. (NYSE:WDR).

Hedge fund interest in Waddell & Reed Financial, Inc. (NYSE:WDR) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Nexa Resources S.A. (NYSE:NEXA), National HealthCare Corporation (NYSE:NHC), and City Holding Company (NASDAQ:CHCO) to gather more data points. Our calculations also showed that WDR 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

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 take a look at the recent hedge fund action surrounding Waddell & Reed Financial, Inc. (NYSE:WDR).

How have hedgies been trading Waddell & Reed Financial, Inc. (NYSE:WDR)?

At Q3’s end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. By comparison, 17 hedge funds held shares or bullish call options in WDR a year ago. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in Waddell & Reed Financial, Inc. (NYSE:WDR) was held by Arrowstreet Capital, which reported holding $35 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $30 million position. Other investors bullish on the company included GAMCO Investors, GLG Partners, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Waddell & Reed Financial, Inc. (NYSE:WDR), around 0.84% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, earmarking 0.4 percent of its 13F equity portfolio to WDR.

Seeing as Waddell & Reed Financial, Inc. (NYSE:WDR) has witnessed a decline in interest from the aggregate hedge fund industry, we can see that there is a sect of fund managers who were dropping their positions entirely last quarter. Interestingly, Renaissance Technologies said goodbye to the largest stake of the “upper crust” of funds followed by Insider Monkey, totaling close to $8.3 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dumped about $0.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Waddell & Reed Financial, Inc. (NYSE:WDR) but similarly valued. These stocks are Nexa Resources S.A. (NYSE:NEXA), National HealthCare Corporation (NYSE:NHC), City Holding Company (NASDAQ:CHCO), and NOW Inc (NYSE:DNOW). All of these stocks’ market caps are closest to WDR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NEXA 6 6943 -3
NHC 7 63580 -2
CHCO 9 25056 -2
DNOW 11 66317 0
Average 8.25 40474 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $40 million. That figure was $125 million in WDR’s case. NOW Inc (NYSE:DNOW) is the most popular stock in this table. On the other hand Nexa Resources S.A. (NYSE:NEXA) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Waddell & Reed Financial, Inc. (NYSE:WDR) is more popular among hedge funds. 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. Unfortunately WDR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WDR were disappointed as the stock returned -4.4% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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