Is Williams-Sonoma, Inc. (WSM) Going to Burn These Hedge Funds?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Is Williams-Sonoma, Inc. (NYSE:WSM) worth your attention right now? The best stock pickers are getting less bullish. The number of long hedge fund positions decreased by 1 recently. WSM was in 24 hedge funds’ portfolio at the end of the third quarter of 2015. There were 25 hedge funds in our database with WSM holdings at the end of the previous quarter. At the end of this article we will also compare WSM to other stocks including Plum Creek Timber Co. Inc. (NYSE:PCL), Franco-Nevada Corporation (NYSE:FNV), and DexCom, Inc. (NASDAQ:DXCM) to get a better sense of its popularity.

To most investors, hedge funds are viewed as worthless, outdated financial vehicles of years past. While there are over 8000 funds in operation today, we choose to focus on the moguls of this group, approximately 700 funds. These money managers administer most of all hedge funds’ total asset base, and by paying attention to their finest picks, Insider Monkey has identified many investment strategies that have historically defeated the broader indices on average (obviously they didn’t outperform the market in every single year, but their average performance was superior). For instance Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points annually for more than a decade in their back tests.

With all of this in mind, we’re going to take a look at the latest action encompassing Williams-Sonoma, Inc. (NYSE:WSM).

What have hedge funds been doing with Williams-Sonoma, Inc. (NYSE:WSM)?

At Q3’s end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their stakes considerably.

According to publicly available hedge fund holdings data compiled by Insider Monkey, Select Equity Group, managed by Robert Joseph Caruso, holds the most valuable position in Williams-Sonoma, Inc. (NYSE:WSM). Select Equity Group has a $279.7 million position in the stock, comprising 2.7% of its 13F portfolio. Sitting at the No. 2 spot is Alkeon Capital Management, managed by Panayotis Takis Sparaggis, which held a $70.8 million position; the fund has 1.5% of its 13F portfolio invested in the stock. Remaining peers with similar optimism consist of David Harding’s Winton Capital Management, Eric Bannasch’s Cadian Capital and Cliff Asness’s AQR Capital Management.

Due to the fact that Williams-Sonoma, Inc. (NYSE:WSM) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there was a specific group of money managers that elected to cut their full holdings last quarter. At the top of the heap, Gabriel Plotkin’s Melvin Capital Management dumped the largest stake of all the hedgies tracked by Insider Monkey, comprising about $44 million in stock, and Dmitry Balyasny of Balyasny Asset Management was right behind this move, as the fund dumped about $37.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Williams-Sonoma, Inc. (NYSE:WSM). These stocks are Plum Creek Timber Co. Inc. (NYSE:PCL), Franco-Nevada Corporation (NYSE:FNV), DexCom, Inc. (NASDAQ:DXCM), and Robert Half International Inc. (NYSE:RHI) (we intentionally didn’t limit our peer group to the companies in the same industry). This group of stocks’ market caps resemble WSM’s market cap.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $420 million. DexCom, Inc. (NASDAQ:DXCM) is the most popular stock in this table. On the other hand Franco-Nevada Corporation (NYSE:FNV) is the least popular one with only 15 bullish hedge fund positions. Williams-Sonoma, Inc. (NYSE:WSM) 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. In this regard DXCM might be a better candidate to consider a long position.