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Here’s What Hedge Funds Think About Watsco Inc (WSO)

Legendary investors such as Jeffrey Talpins and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Watsco Inc (NYSE:WSO) from the perspective of those elite funds.

Is Watsco Inc (NYSE:WSO) a bargain? Investors who are in the know are betting on the stock. The number of long hedge fund bets moved up by 4 recently. Our calculations also showed that wso isn’t among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Tom Gayner

Let’s check out the new hedge fund action regarding Watsco Inc (NYSE:WSO).

How have hedgies been trading Watsco Inc (NYSE:WSO)?

At Q1’s end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WSO over the last 15 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with WSO Positions

Of the funds tracked by Insider Monkey, Tom Gayner’s Markel Gayner Asset Management has the number one position in Watsco Inc (NYSE:WSO), worth close to $47.1 million, corresponding to 0.8% of its total 13F portfolio. Coming in second is Renaissance Technologies, led by Jim Simons, holding a $44.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish contain Ken Griffin’s Citadel Investment Group, Israel Englander’s Millennium Management and D. E. Shaw’s D E Shaw.

As one would reasonably expect, key money managers were breaking ground themselves. Holocene Advisors, managed by Brandon Haley, assembled the biggest position in Watsco Inc (NYSE:WSO). Holocene Advisors had $1.1 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also initiated a $0.9 million position during the quarter. The following funds were also among the new WSO investors: Jeffrey Talpins’s Element Capital Management, Roger Ibbotson’s Zebra Capital Management, and John A. Levin’s Levin Capital Strategies.

Let’s now review hedge fund activity in other stocks similar to Watsco Inc (NYSE:WSO). These stocks are Syneos Health, Inc. (NASDAQ:SYNH), Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI), Morningstar, Inc. (NASDAQ:MORN), and Gentex Corporation (NASDAQ:GNTX). This group of stocks’ market values are closest to WSO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SYNH 26 333112 2
OLLI 22 155022 -2
MORN 21 225704 1
GNTX 23 308447 0
Average 23 255571 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $256 million. That figure was $138 million in WSO’s case. Syneos Health, Inc. (NASDAQ:SYNH) is the most popular stock in this table. On the other hand Morningstar, Inc. (NASDAQ:MORN) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Watsco Inc (NYSE:WSO) is even less popular than MORN. Hedge funds clearly dropped the ball on WSO as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on WSO as the stock returned 12% during the same period and outperformed the market by an even larger margin.

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

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