Hedge Funds Were Getting Burned By 58.com Inc (WUBA) Before The Coronavirus

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 (10 coronavirus predictions).

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 see whether 58.com Inc (NYSE:WUBA) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

58.com Inc (NYSE:WUBA) was in 21 hedge funds’ portfolios at the end of December. WUBA investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. There were 26 hedge funds in our database with WUBA positions at the end of the previous quarter. Our calculations also showed that WUBA 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.

Kerr Neilson of Platinum Asset Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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 take a look at the key hedge fund action regarding 58.com Inc (NYSE:WUBA).

What does smart money think about 58.com Inc (NYSE:WUBA)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WUBA over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in 58.com Inc (NYSE:WUBA) was held by Platinum Asset Management, which reported holding $157.7 million worth of stock at the end of September. It was followed by GMT Capital with a $80.9 million position. Other investors bullish on the company included Lakewood Capital Management, Kora Management, and First Pacific Advisors LLC. In terms of the portfolio weights assigned to each position Kora Management allocated the biggest weight to 58.com Inc (NYSE:WUBA), around 7.11% of its 13F portfolio. MD Sass is also relatively very bullish on the stock, dishing out 3.66 percent of its 13F equity portfolio to WUBA.

Because 58.com Inc (NYSE:WUBA) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there exists a select few fund managers that decided to sell off their positions entirely in the third quarter. Interestingly, Noam Gottesman’s GLG Partners said goodbye to the largest investment of the “upper crust” of funds followed by Insider Monkey, valued at about $4.1 million in stock, and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund cut about $3.2 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 5 funds in the third quarter.

Let’s check out hedge fund activity in other stocks similar to 58.com Inc (NYSE:WUBA). These stocks are National Oilwell Varco, Inc. (NYSE:NOV), Vail Resorts, Inc. (NYSE:MTN), Black Knight, Inc. (NYSE:BKI), and NICE Ltd. (NASDAQ:NICE). All of these stocks’ market caps resemble WUBA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NOV 31 1019880 5
MTN 33 552480 -6
BKI 31 529645 -14
NICE 19 425511 2
Average 28.5 631879 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $632 million. That figure was $476 million in WUBA’s case. Vail Resorts, Inc. (NYSE:MTN) is the most popular stock in this table. On the other hand NICE Ltd. (NASDAQ:NICE) is the least popular one with only 19 bullish hedge fund positions. 58.com Inc (NYSE:WUBA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately WUBA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WUBA investors were disappointed as the stock returned -30.2% 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 most of these stocks already outperformed the market in Q1.
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.