Was The Smart Money Right About Western Digital Corporation (WDC)?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Western Digital Corporation (NASDAQ:WDC) to find out whether there were any major changes in hedge funds’ views.

Is Western Digital Corporation (NASDAQ:WDC) going to take off soon? The smart money was becoming less hopeful. The number of bullish hedge fund bets were cut by 1 recently. Western Digital Corporation (NASDAQ:WDC) was in 57 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 58. Our calculations also showed that WDC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 58 hedge funds in our database with WDC positions at the end of the first quarter.

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 79 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 scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now let’s take a peek at the key hedge fund action surrounding Western Digital Corporation (NASDAQ:WDC).

Do Hedge Funds Think WDC Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 57 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WDC over the last 24 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Point72 Asset Management held the most valuable stake in Western Digital Corporation (NASDAQ:WDC), which was worth $413.6 million at the end of the second quarter. On the second spot was Lyrical Asset Management which amassed $307.8 million worth of shares. Millennium Management, Balyasny Asset Management, 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 Thunderbird Partners allocated the biggest weight to Western Digital Corporation (NASDAQ:WDC), around 11.54% of its 13F portfolio. Maple Rock Capital is also relatively very bullish on the stock, setting aside 10.98 percent of its 13F equity portfolio to WDC.

Judging by the fact that Western Digital Corporation (NASDAQ:WDC) has experienced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of hedge funds that decided to sell off their positions entirely last quarter. At the top of the heap, Jerry Kochanski’s Shelter Haven Capital Management dropped the largest stake of all the hedgies monitored by Insider Monkey, valued at about $46.6 million in stock. Israel Englander’s fund, Millennium Management, also sold off its stock, about $26.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 1 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Western Digital Corporation (NASDAQ:WDC). We will take a look at Royal Caribbean Cruises Ltd. (NYSE:RCL), Dover Corporation (NYSE:DOV), Caesars Entertainment Inc. (NASDAQ:CZR), Xylem Inc (NYSE:XYL), Fox Corporation (NASDAQ:FOXA), PPL Corporation (NYSE:PPL), and 10x Genomics, Inc. (NASDAQ:TXG). This group of stocks’ market valuations match WDC’s market valuation.

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As you can see these stocks had an average of 36.1 hedge funds with bullish positions and the average amount invested in these stocks was $911 million. That figure was $2114 million in WDC’s case. Caesars Entertainment Inc. (NASDAQ:CZR) is the most popular stock in this table. On the other hand Xylem Inc (NYSE:XYL) is the least popular one with only 23 bullish hedge fund positions. Western Digital Corporation (NASDAQ:WDC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WDC is 67.5. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 26.3% in 2021 through October 29th and beat the market again by 2.3 percentage points. Unfortunately WDC wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on WDC were disappointed as the stock returned -26.5% since the end of June (through 10/29) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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