Is Advanced Drainage Systems, Inc. (WMS) Going to Burn These Hedge Funds?

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. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Advanced Drainage Systems, Inc. (NYSE:WMS) based on those filings.

Advanced Drainage Systems, Inc. (NYSE:WMS) has seen a decrease in support from the world’s most elite money managers recently. WMS was in 25 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 27 hedge funds in our database with WMS positions at the end of the previous quarter. Our calculations also showed that WMS 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).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

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, 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. With all of this in mind we’re going to review the key hedge fund action encompassing Advanced Drainage Systems, Inc. (NYSE:WMS).

What have hedge funds been doing with Advanced Drainage Systems, Inc. (NYSE:WMS)?

Heading into the first quarter of 2020, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in WMS a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Advanced Drainage Systems, Inc. (NYSE:WMS) was held by Stockbridge Partners, which reported holding $158.6 million worth of stock at the end of September. It was followed by Impax Asset Management with a $115.8 million position. Other investors bullish on the company included MIG Capital, Renaissance Technologies, and D E Shaw. In terms of the portfolio weights assigned to each position Stockbridge Partners allocated the biggest weight to Advanced Drainage Systems, Inc. (NYSE:WMS), around 5.75% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, dishing out 5.71 percent of its 13F equity portfolio to WMS.

Judging by the fact that Advanced Drainage Systems, Inc. (NYSE:WMS) has faced bearish sentiment from the smart money, logic holds that there were a few hedgies who sold off their positions entirely by the end of the third quarter. Interestingly, Matt Diserio and Disque Deane Jr.’s Water Asset Management cut the biggest stake of the 750 funds followed by Insider Monkey, totaling about $0.9 million in stock. Joel Greenblatt’s fund, Gotham Asset Management, also said goodbye to its stock, about $0.6 million worth. These moves are important to note, as aggregate hedge fund interest fell by 2 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to Advanced Drainage Systems, Inc. (NYSE:WMS). We will take a look at Fluor Corporation (NYSE:FLR), Commercial Metals Company (NYSE:CMC), Pattern Energy Group Inc (NASDAQ:PEGI), and Everbridge, Inc. (NASDAQ:EVBG). This group of stocks’ market caps match WMS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FLR 24 274625 4
CMC 27 265495 7
PEGI 22 103268 8
EVBG 37 565362 5
Average 27.5 302188 6

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $302 million. That figure was $487 million in WMS’s case. Everbridge, Inc. (NASDAQ:EVBG) is the most popular stock in this table. On the other hand Pattern Energy Group Inc (NASDAQ:PEGI) is the least popular one with only 22 bullish hedge fund positions. Advanced Drainage Systems, Inc. (NYSE:WMS) 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 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately WMS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WMS investors were disappointed as the stock returned -23.3% 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 2020.
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.