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Is Cactus, Inc. (WHD) Going To Burn These Hedge Funds ?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Cactus, Inc. (NYSE:WHD).

Cactus, Inc. (NYSE:WHD) has experienced a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that WHD isn’t among the 30 most popular stocks among hedge funds (see the video below).
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

WHD_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to go over the recent hedge fund action surrounding Cactus, Inc. (NYSE:WHD).

How have hedgies been trading Cactus, Inc. (NYSE:WHD)?

Heading into the third quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in WHD over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

David Harding

When looking at the institutional investors followed by Insider Monkey, Ken Griffin’s Citadel Investment Group has the largest position in Cactus, Inc. (NYSE:WHD), worth close to $33.9 million, amounting to less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Millennium Management, led by Israel Englander, holding a $32.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions consist of Todd J. Kantor’s Encompass Capital AdvisorsPerella Weinberg Partners and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Since Cactus, Inc. (NYSE:WHD) has experienced falling interest from hedge fund managers, it’s safe to say that there were a few hedge funds that decided to sell off their full holdings heading into Q3. It’s worth mentioning that Alec Litowitz and Ross Laser’s Magnetar Capital cut the largest investment of all the hedgies watched by Insider Monkey, totaling an estimated $14.2 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also cut its stock, about $7.5 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Cactus, Inc. (NYSE:WHD). We will take a look at Core Laboratories N.V. (NYSE:CLB), Patterson-UTI Energy, Inc. (NASDAQ:PTEN), II-VI, Inc. (NASDAQ:IIVI), and CareTrust REIT Inc (NASDAQ:CTRE). This group of stocks’ market caps are similar to WHD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CLB 21 244121 6
PTEN 25 289200 -9
IIVI 21 110008 -1
CTRE 20 127935 4
Average 21.75 192816 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $193 million. That figure was $210 million in WHD’s case. Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is the most popular stock in this table. On the other hand CareTrust REIT Inc (NASDAQ:CTRE) is the least popular one with only 20 bullish hedge fund positions. Cactus, Inc. (NYSE:WHD) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately WHD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WHD were disappointed as the stock returned -12.6% during the third quarter 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 many of these stocks already outperformed the market so far this year.

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

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