Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth depends on it. Regardless of the various methods used by elite investors like David Tepper and Dan Loeb, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.
Is The Western Union Company (NYSE:WU) an attractive investment now? Hedge funds are turning less bullish. The number of bullish hedge fund positions dropped by 1 in recent months. Our calculations also showed that WU isn’t among the 30 most popular stocks among hedge funds. WU was in 20 hedge funds’ portfolios at the end of the third quarter of 2018. There were 21 hedge funds in our database with WU positions at the end of the previous quarter.
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 18 percentage points since May 2014 through December 3, 2018 (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.
Let’s take a look at the recent hedge fund action regarding The Western Union Company (NYSE:WU).
How have hedgies been trading The Western Union Company (NYSE:WU)?
Heading into the fourth quarter of 2018, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in WU heading into this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Abrams Capital Management, managed by David Abrams, holds the largest position in The Western Union Company (NYSE:WU). Abrams Capital Management has a $403.4 million position in the stock, comprising 10.7% of its 13F portfolio. Coming in second is Ariel Investments, led by John W. Rogers, holding a $78.4 million position; 0.9% of its 13F portfolio is allocated to the stock. Other professional money managers that hold long positions contain Bernard Horn’s Polaris Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Israel Englander’s Millennium Management.
Since The Western Union Company (NYSE:WU) has witnessed bearish sentiment from the smart money, logic holds that there were a few money managers who were dropping their positions entirely in the third quarter. It’s worth mentioning that George Hall’s Clinton Group dropped the largest position of all the hedgies monitored by Insider Monkey, totaling an estimated $3.5 million in stock. Jeffrey Talpins’s fund, Element Capital Management, also cut its stock, about $2.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds in the third quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as The Western Union Company (NYSE:WU) but similarly valued. These stocks are Alaska Air Group, Inc. (NYSE:ALK), FLIR Systems, Inc. (NASDAQ:FLIR), IPG Photonics Corporation (NASDAQ:IPGP), and Credit Acceptance Corp. (NASDAQ:CACC). This group of stocks’ market caps are closest to WU’s market cap.
|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 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $628 million. That figure was $668 million in WU’s case. FLIR Systems, Inc. (NASDAQ:FLIR) is the most popular stock in this table. On the other hand IPG Photonics Corporation (NASDAQ:IPGP) is the least popular one with only 16 bullish hedge fund positions. The Western Union Company (NYSE:WU) 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. In this regard FLIR might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.