How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding The Williams Companies, Inc. (NYSE:WMB).
Is WMB a good stock to buy? The Williams Companies, Inc. (NYSE:WMB) investors should be aware of a decrease in enthusiasm from smart money lately. The Williams Companies, Inc. (NYSE:WMB) was in 38 hedge funds’ portfolios at the end of September. The all time high for this statistic is 73. There were 41 hedge funds in our database with WMB positions at the end of the second quarter. Our calculations also showed that WMB isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 66 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 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.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind let’s analyze the latest hedge fund action surrounding The Williams Companies, Inc. (NYSE:WMB).
Do Hedge Funds Think WMB Is A Good Stock To Buy Now?
At the end of September, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WMB over the last 21 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Mason Hawkins’s Southeastern Asset Management has the biggest position in The Williams Companies, Inc. (NYSE:WMB), worth close to $179.3 million, comprising 4.6% of its total 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, led by Ken Griffin, holding a $120.2 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism consist of Israel Englander’s Millennium Management, John Murphy’s Levin Easterly Partners and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Heronetta Management allocated the biggest weight to The Williams Companies, Inc. (NYSE:WMB), around 6.82% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, earmarking 4.62 percent of its 13F equity portfolio to WMB.
Judging by the fact that The Williams Companies, Inc. (NYSE:WMB) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few hedgies who sold off their full holdings heading into Q4. Intriguingly, Brandon Haley’s Holocene Advisors cut the largest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $25.2 million in stock. fund, Renaissance Technologies, also dropped its stock, about $15.1 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds heading into Q4.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as The Williams Companies, Inc. (NYSE:WMB) but similarly valued. These stocks are Sun Life Financial Inc. (NYSE:SLF), New Oriental Education & Technology Group Inc. (NYSE:EDU), Unity Software Inc. (NYSE:U), American International Group Inc (NYSE:AIG), Genmab A/S (NASDAQ:GMAB), Hilton Worldwide Holdings Inc (NYSE:HLT), and Palo Alto Networks Inc (NYSE:PANW). This group of stocks’ market valuations are similar to WMB’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 37.1 hedge funds with bullish positions and the average amount invested in these stocks was $2681 million. That figure was $582 million in WMB’s case. Palo Alto Networks Inc (NYSE:PANW) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 13 bullish hedge fund positions. The Williams Companies, Inc. (NYSE:WMB) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WMB is 44.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and beat the market again by 16.4 percentage points. Unfortunately WMB wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WMB were disappointed as the stock returned 9.7% since the end of September (through 12/18) 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.