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Is WellCare Health Plans, Inc. (WCG) A Good Stock To Buy?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Hedge funds’ top 3 stock picks returned 39.1% this year and beat the S&P 500 ETFs by nearly 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 WellCare Health Plans, Inc. (NYSE:WCG).

WellCare Health Plans, Inc. (NYSE:WCG) has seen a decrease in activity from the world’s largest hedge funds lately. WCG was in 41 hedge funds’ portfolios at the end of September. There were 46 hedge funds in our database with WCG positions at the end of the previous quarter. Our calculations also showed that WCG isn’t among the 30 most popular stocks among hedge funds.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.

PAULSON & CO

John Paulson of Paulson & Co

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the latest hedge fund action encompassing WellCare Health Plans, Inc. (NYSE:WCG).

What does smart money think about WellCare Health Plans, Inc. (NYSE:WCG)?

Heading into the fourth quarter of 2019, a total of 41 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in WCG over the last 17 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with WCG Positions

Among these funds, Magnetar Capital held the most valuable stake in WellCare Health Plans, Inc. (NYSE:WCG), which was worth $211.9 million at the end of the third quarter. On the second spot was Water Island Capital which amassed $154.4 million worth of shares. Paulson & Co, Alpine Associates, and Citadel Investment Group 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 White Square Capital allocated the biggest weight to WellCare Health Plans, Inc. (NYSE:WCG), around 27.54% of its portfolio. Water Island Capital is also relatively very bullish on the stock, setting aside 9.6 percent of its 13F equity portfolio to WCG.

Judging by the fact that WellCare Health Plans, Inc. (NYSE:WCG) has faced a decline in interest from hedge fund managers, we can see that there exists a select few hedge funds that slashed their positions entirely heading into Q4. Interestingly, Andreas Halvorsen’s Viking Global dropped the biggest position of the 750 funds watched by Insider Monkey, totaling an estimated $105.9 million in stock, and Shane Finemore’s Manikay Partners was right behind this move, as the fund said goodbye to about $42.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 5 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as WellCare Health Plans, Inc. (NYSE:WCG) but similarly valued. These stocks are Centrais Eletricas Brasileiras S.A. – Eletrobras (NYSE:EBR), Ally Financial Inc (NYSE:ALLY), Icahn Enterprises LP (NASDAQ:IEP), and Slack Technologies Inc (NYSE:WORK). This group of stocks’ market caps are closest to WCG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EBR 5 21001 -1
ALLY 51 2112182 8
IEP 5 12357565 0
WORK 27 326449 -10
Average 22 3704299 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $3704 million. That figure was $1792 million in WCG’s case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Centrais Eletricas Brasileiras S.A. – Eletrobras (NYSE:EBR) is the least popular one with only 5 bullish hedge fund positions. WellCare Health Plans, Inc. (NYSE:WCG) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Hedge funds were also right about betting on WCG as the stock returned 22.8% during the fourth quarter (through 11/22) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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