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Hedge Funds Have Never Been This Bullish On Evoqua Water Technologies Corp. (AQUA)

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Evoqua Water Technologies Corp. (NYSE:AQUA) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Evoqua Water Technologies Corp. (NYSE:AQUA) a buy, sell, or hold? Investors who are in the know are betting on the stock. The number of long hedge fund bets moved up by 5 lately. Our calculations also showed that AQUA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s go over the fresh hedge fund action regarding Evoqua Water Technologies Corp. (NYSE:AQUA).

How have hedgies been trading Evoqua Water Technologies Corp. (NYSE:AQUA)?

Heading into the first quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 31% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AQUA over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, P2 Capital Partners was the largest shareholder of Evoqua Water Technologies Corp. (NYSE:AQUA), with a stake worth $82.3 million reported as of the end of September. Trailing P2 Capital Partners was Renaissance Technologies, which amassed a stake valued at $28 million. Millennium Management, D E Shaw, and Impax Asset Management 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 P2 Capital Partners allocated the biggest weight to Evoqua Water Technologies Corp. (NYSE:AQUA), around 6.04% of its 13F portfolio. Concourse Capital Management is also relatively very bullish on the stock, dishing out 1.71 percent of its 13F equity portfolio to AQUA.

Consequently, key hedge funds were breaking ground themselves. Impax Asset Management, managed by Ian Simm, created the most valuable position in Evoqua Water Technologies Corp. (NYSE:AQUA). Impax Asset Management had $4.3 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $3.2 million position during the quarter. The following funds were also among the new AQUA investors: Noam Gottesman’s GLG Partners, John Overdeck and David Siegel’s Two Sigma Advisors, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s now review hedge fund activity in other stocks similar to Evoqua Water Technologies Corp. (NYSE:AQUA). These stocks are BEST Inc. (NYSE:BEST), Flagstar Bancorp Inc (NYSE:FBC), Ladder Capital Corp (NYSE:LADR), and WillScot Corporation (NASDAQ:WSC). This group of stocks’ market valuations are closest to AQUA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BEST 10 23819 -4
FBC 20 154140 5
LADR 11 61347 -2
WSC 28 336936 4
Average 17.25 144061 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $144 million. That figure was $170 million in AQUA’s case. WillScot Corporation (NASDAQ:WSC) is the most popular stock in this table. On the other hand BEST Inc. (NYSE:BEST) is the least popular one with only 10 bullish hedge fund positions. Evoqua Water Technologies Corp. (NYSE:AQUA) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately AQUA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AQUA were disappointed as the stock returned -35.7% during the same time period 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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