How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Mueller Water Products, Inc. (NYSE:MWA) and determine whether hedge funds had an edge regarding this stock.
Mueller Water Products, Inc. (NYSE:MWA) shareholders have witnessed an increase in hedge fund interest recently. Mueller Water Products, Inc. (NYSE:MWA) was in 21 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 25. Our calculations also showed that MWA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we’re going to review the recent hedge fund action encompassing Mueller Water Products, Inc. (NYSE:MWA).
What have hedge funds been doing with Mueller Water Products, Inc. (NYSE:MWA)?
Heading into the third quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from one quarter earlier. On the other hand, there were a total of 18 hedge funds with a bullish position in MWA a year ago. 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, Impax Asset Management was the largest shareholder of Mueller Water Products, Inc. (NYSE:MWA), with a stake worth $109.7 million reported as of the end of September. Trailing Impax Asset Management was GAMCO Investors, which amassed a stake valued at $47.7 million. Cove Street Capital, Arrowstreet Capital, and GLG Partners 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 Cove Street Capital allocated the biggest weight to Mueller Water Products, Inc. (NYSE:MWA), around 1.68% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, dishing out 1.13 percent of its 13F equity portfolio to MWA.
As one would reasonably expect, key hedge funds were leading the bulls’ herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, created the biggest position in Mueller Water Products, Inc. (NYSE:MWA). Marshall Wace LLP had $1.4 million invested in the company at the end of the quarter. Peter Muller’s PDT Partners also made a $1.4 million investment in the stock during the quarter. The other funds with brand new MWA positions are Paul Tudor Jones’s Tudor Investment Corp, Brandon Haley’s Holocene Advisors, and Bruce Kovner’s Caxton Associates LP.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Mueller Water Products, Inc. (NYSE:MWA) but similarly valued. These stocks are Sinclair Broadcast Group, Inc. (NASDAQ:SBGI), Zuora, Inc. (NYSE:ZUO), LTC Properties Inc (NYSE:LTC), Turquoise Hill Resources Ltd (NYSE:TRQ), Super Micro Computer, Inc. (NASDAQ:SMCI), Boise Cascade Co (NYSE:BCC), and Rattler Midstream LP (NASDAQ:RTLR). This group of stocks’ market valuations resemble MWA’s market valuation.
|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 16.4 hedge funds with bullish positions and the average amount invested in these stocks was $173 million. That figure was $198 million in MWA’s case. Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) is the most popular stock in this table. On the other hand Rattler Midstream LP (NASDAQ:RTLR) is the least popular one with only 7 bullish hedge fund positions. Mueller Water Products, Inc. (NYSE:MWA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MWA is 72.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on MWA, though not to the same extent, as the stock returned 10.7% in Q3 and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.