Were Hedge Funds Right About Selling Wayfair Inc (W) Heading Into Q4?

Does Wayfair Inc (NYSE:W) represent a good buying opportunity at the moment? Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Is Wayfair Inc (NYSE:W) the right pick for your portfolio? Hedge funds are selling. The number of bullish hedge fund bets were cut by 2 lately. Our calculations also showed that W isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). W was in 30 hedge funds’ portfolios at the end of September. There were 32 hedge funds in our database with W holdings at the end of the previous quarter.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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.

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. Let’s take a glance at the latest hedge fund action regarding Wayfair Inc (NYSE:W).

What does smart money think about Wayfair Inc (NYSE:W)?

Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the previous quarter. On the other hand, there were a total of 30 hedge funds with a bullish position in W a year ago. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

The largest stake in Wayfair Inc (NYSE:W) was held by Spruce House Investment Management, which reported holding $476.5 million worth of stock at the end of September. It was followed by Bares Capital Management with a $269.3 million position. Other investors bullish on the company included Whale Rock Capital Management, D E Shaw, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Spruce House Investment Management allocated the biggest weight to Wayfair Inc (NYSE:W), around 17.24% of its portfolio. Bares Capital Management is also relatively very bullish on the stock, dishing out 8.08 percent of its 13F equity portfolio to W.

Judging by the fact that Wayfair Inc (NYSE:W) has faced bearish sentiment from hedge fund managers, it’s safe to say that there were a few fund managers who sold off their positions entirely in the third quarter. It’s worth mentioning that Robert Pohly’s Samlyn Capital said goodbye to the largest investment of the “upper crust” of funds followed by Insider Monkey, valued at about $68.8 million in call options. Leon Shaulov’s fund, Maplelane Capital, also dropped its call options, about $21.9 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Wayfair Inc (NYSE:W) but similarly valued. These stocks are Federal Realty Investment Trust (NYSE:FRT), Mylan N.V. (NASDAQ:MYL), Brown & Brown, Inc. (NYSE:BRO), and Tyler Technologies, Inc. (NYSE:TYL). This group of stocks’ market valuations are closest to W’s market valuation.

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As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $820 million. That figure was $1831 million in W’s case. Mylan N.V. (NASDAQ:MYL) is the most popular stock in this table. On the other hand Federal Realty Investment Trust (NYSE:FRT) is the least popular one with only 22 bullish hedge fund positions. Wayfair Inc (NYSE:W) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately W wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on W were disappointed as the stock returned -24.3% during the fourth quarter (through the end of November) 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.