Were Hedge Funds Right About Buying Cactus, Inc. (WHD)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Cactus, Inc. (NYSE:WHD) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Cactus, Inc. (NYSE:WHD) investors should pay attention to an increase in activity from the world’s largest hedge funds of late. WHD was in 18 hedge funds’ portfolios at the end of March. There were 17 hedge funds in our database with WHD positions at the end of the previous quarter. Our calculations also showed that WHD isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 58 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. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a peek at the recent hedge fund action surrounding Cactus, Inc. (NYSE:WHD).

Hedge fund activity in Cactus, Inc. (NYSE:WHD)

At Q1’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards WHD over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Encompass Capital Advisors held the most valuable stake in Cactus, Inc. (NYSE:WHD), which was worth $22.8 million at the end of the third quarter. On the second spot was Deep Basin Capital which amassed $18.4 million worth of shares. Arosa Capital Management, Citadel Investment Group, and Adage Capital Management 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 Deep Basin Capital allocated the biggest weight to Cactus, Inc. (NYSE:WHD), around 4.68% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, earmarking 2.44 percent of its 13F equity portfolio to WHD.

As industrywide interest jumped, key money managers were breaking ground themselves. Makaira Partners, managed by Thomas Bancroft, established the most outsized position in Cactus, Inc. (NYSE:WHD). Makaira Partners had $1.7 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $0.4 million position during the quarter. The only other fund with a brand new WHD position is Greg Eisner’s Engineers Gate Manager.

Let’s also examine hedge fund activity in other stocks similar to Cactus, Inc. (NYSE:WHD). These stocks are Office Depot Inc (NYSE:ODP), Scholastic Corp (NASDAQ:SCHL), Axonics Modulation Technologies, Inc. (NASDAQ:AXNX), and Stratasys, Ltd. (NASDAQ:SSYS). This group of stocks’ market caps resemble WHD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $114 million. That figure was $99 million in WHD’s case. Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) is the most popular stock in this table. On the other hand Scholastic Corp (NASDAQ:SCHL) is the least popular one with only 11 bullish hedge fund positions. Cactus, Inc. (NYSE:WHD) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on WHD as the stock returned 96.2% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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