We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Encore Wire Corporation (NASDAQ:WIRE).
Is Encore Wire Corporation (NASDAQ:WIRE) a buy here? Prominent investors are getting more optimistic. The number of long hedge fund bets moved up by 1 recently. Our calculations also showed that WIRE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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 check out the fresh hedge fund action regarding Encore Wire Corporation (NASDAQ:WIRE).
Hedge fund activity in Encore Wire Corporation (NASDAQ:WIRE)
Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards WIRE over the last 17 quarters. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
The largest stake in Encore Wire Corporation (NASDAQ:WIRE) was held by AQR Capital Management, which reported holding $8 million worth of stock at the end of September. It was followed by Royce & Associates with a $7.8 million position. Other investors bullish on the company included Renaissance Technologies, Arrowstreet Capital, and Forest Hill Capital. In terms of the portfolio weights assigned to each position Forest Hill Capital allocated the biggest weight to Encore Wire Corporation (NASDAQ:WIRE), around 1.2% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, setting aside 0.74 percent of its 13F equity portfolio to WIRE.
With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Weld Capital Management, managed by Minhua Zhang, created the most outsized position in Encore Wire Corporation (NASDAQ:WIRE). Weld Capital Management had $0.5 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also initiated a $0.3 million position during the quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Encore Wire Corporation (NASDAQ:WIRE) but similarly valued. We will take a look at Tronox Limited (NYSE:TROX), Milacron Holdings Corp (NYSE:MCRN), Turning Point Therapeutics, Inc. (NASDAQ:TPTX), and 1st Source Corporation (NASDAQ:SRCE). This group of stocks’ market values resemble WIRE’s market value.
|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 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $45 million in WIRE’s case. Turning Point Therapeutics, Inc. (NASDAQ:TPTX) is the most popular stock in this table. On the other hand 1st Source Corporation (NASDAQ:SRCE) is the least popular one with only 8 bullish hedge fund positions. Encore Wire Corporation (NASDAQ:WIRE) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 WIRE wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WIRE were disappointed as the stock returned 3.7% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.