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Hedge Funds Dipping Their Toes Into Watsco Inc (WSO)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Watsco Inc (NYSE:WSO) and determine whether hedge funds had an edge regarding this stock.

Is Watsco Inc (NYSE:WSO) a healthy stock for your portfolio? Money managers were getting more optimistic. The number of long hedge fund bets increased by 1 recently. Watsco Inc (NYSE:WSO) was in 21 hedge funds’ portfolios at the end of June. The all time high for this statistics is 26. Our calculations also showed that WSO isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 20 hedge funds in our database with WSO holdings at the end of March.

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.

Lee Ainslie MAVERICK CAPITAL

Lee Ainslie of Maverick Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s analyze the latest hedge fund action regarding Watsco Inc (NYSE:WSO).

Hedge fund activity in Watsco Inc (NYSE:WSO)

At the end of June, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in WSO over the last 20 quarters. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Markel Gayner Asset Management, managed by Tom Gayner, holds the largest position in Watsco Inc (NYSE:WSO). Markel Gayner Asset Management has a $70.5 million position in the stock, comprising 1.3% of its 13F portfolio. On Markel Gayner Asset Management’s heels is Israel Englander of Millennium Management, with a $31.4 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish encompass Bryan Hinmon’s Motley Fool Asset Management, Renaissance Technologies and Chuck Royce’s Royce & Associates. In terms of the portfolio weights assigned to each position Motley Fool Asset Management allocated the biggest weight to Watsco Inc (NYSE:WSO), around 3.1% of its 13F portfolio. Running Oak Capital is also relatively very bullish on the stock, dishing out 1.73 percent of its 13F equity portfolio to WSO.

With a general bullishness amongst the heavyweights, specific money managers have jumped into Watsco Inc (NYSE:WSO) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, created the most outsized position in Watsco Inc (NYSE:WSO). Balyasny Asset Management had $18.7 million invested in the company at the end of the quarter. Mark Coe’s Intrinsic Edge Capital also initiated a $7.4 million position during the quarter. The other funds with new positions in the stock are Ken Grossman and Glen Schneider’s SG Capital Management, Seth Cogswell’s Running Oak Capital, and Lee Ainslie’s Maverick Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Watsco Inc (NYSE:WSO) but similarly valued. These stocks are Hubbell Incorporated (NYSE:HUBB), Kilroy Realty Corp (NYSE:KRC), Omega Healthcare Investors Inc (NYSE:OHI), OneConnect Financial Technology Co., Ltd. (NYSE:OCFT), Newell Brands Inc. (NASDAQ:NWL), Lamar Advertising Company (REIT) (NASDAQ:LAMR), and The Interpublic Group of Companies Inc (NYSE:IPG). This group of stocks’ market values match WSO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HUBB 29 335298 14
KRC 20 411400 0
OHI 23 107776 6
OCFT 5 8062 2
NWL 33 1244198 9
LAMR 44 419738 10
IPG 22 501395 1
Average 25.1 432552 6

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.1 hedge funds with bullish positions and the average amount invested in these stocks was $433 million. That figure was $230 million in WSO’s case. Lamar Advertising Company (REIT) (NASDAQ:LAMR) is the most popular stock in this table. On the other hand OneConnect Financial Technology Co., Ltd. (NYSE:OCFT) 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 overall hedge fund sentiment score for WSO is 50.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 gained 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on WSO as the stock returned 32.3% in the third quarter and outperformed the market by an even larger margin.

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