Hedge Funds More Bullish, But Staying Clear Of Watford Holdings Ltd. (WTRE)

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Watford Holdings Ltd. (NASDAQ:WTRE).

Watford Holdings Ltd. (NASDAQ:WTRE) was in 6 hedge funds’ portfolios at the end of the third quarter of 2019. WTRE investors should be aware of an increase in activity from the world’s largest hedge funds of late. There were 3 hedge funds in our database with WTRE holdings at the end of the previous quarter. Our calculations also showed that WTRE 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.

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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s check out the fresh hedge fund action surrounding Watford Holdings Ltd. (NASDAQ:WTRE).

What have hedge funds been doing with Watford Holdings Ltd. (NASDAQ:WTRE)?

At the end of the third quarter, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 100% from the second quarter of 2019. On the other hand, there were a total of 0 hedge funds with a bullish position in WTRE a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

More specifically, Capital Returns Management was the largest shareholder of Watford Holdings Ltd. (NASDAQ:WTRE), with a stake worth $2.7 million reported as of the end of September. Trailing Capital Returns Management was Citadel Investment Group, which amassed a stake valued at $0.7 million. Tudor Investment Corp, Weiss Asset Management, and D E Shaw 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 Capital Returns Management allocated the biggest weight to Watford Holdings Ltd. (NASDAQ:WTRE), around 4.45% of its 13F portfolio. Weiss Asset Management is also relatively very bullish on the stock, dishing out 0.04 percent of its 13F equity portfolio to WTRE.

Consequently, some big names have jumped into Watford Holdings Ltd. (NASDAQ:WTRE) headfirst. Capital Returns Management, managed by Ron Bobman, assembled the most outsized position in Watford Holdings Ltd. (NASDAQ:WTRE). Capital Returns Management had $2.7 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also initiated a $0.5 million position during the quarter. The other funds with new positions in the stock are Andrew Weiss’s Weiss Asset Management and David E. Shaw’s D E Shaw.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Watford Holdings Ltd. (NASDAQ:WTRE) but similarly valued. We will take a look at Daqo New Energy Corp (NYSE:DQ), DXP Enterprises Inc (NASDAQ:DXPE), Quanterix Corporation (NASDAQ:QTRX), and America’s Car-Mart, Inc. (NASDAQ:CRMT). This group of stocks’ market caps match WTRE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DQ 10 21279 4
DXPE 9 63404 -2
QTRX 10 42340 2
CRMT 21 87866 -2
Average 12.5 53722 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $5 million in WTRE’s case. America’s Car-Mart, Inc. (NASDAQ:CRMT) is the most popular stock in this table. On the other hand DXP Enterprises Inc (NASDAQ:DXPE) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Watford Holdings Ltd. (NASDAQ:WTRE) is even less popular than DXPE. Hedge funds dodged a bullet by taking a bearish stance towards WTRE. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately WTRE wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); WTRE investors were disappointed as the stock returned 0.4% 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 70 percent of these stocks already outperformed the market so far in Q4.

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