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

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Cactus, Inc. (NYSE:WHD) based on those filings.

Is Cactus, Inc. (NYSE:WHD) an excellent stock to buy now? Hedge funds are becoming less confident. The number of long hedge fund bets decreased by 2 in recent months. Our calculations also showed that WHD isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). WHD was in 17 hedge funds’ portfolios at the end of December. There were 19 hedge funds in our database with WHD positions at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

CITADEL INVESTMENT GROUP

Ken Griffin of Citadel Investment Group

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the new hedge fund action surrounding Cactus, Inc. (NYSE:WHD).

How have hedgies been trading Cactus, Inc. (NYSE:WHD)?

At the end of the fourth quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in WHD over the last 18 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.

Is WHD A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Todd J. Kantor’s Encompass Capital Advisors has the largest position in Cactus, Inc. (NYSE:WHD), worth close to $37.9 million, comprising 2.4% of its total 13F portfolio. The second largest stake is held by Arosa Capital Management, managed by Till Bechtolsheimer, which holds a $19.4 million position; the fund has 4% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions consist of Ken Griffin’s Citadel Investment Group, Matt Smith’s Deep Basin Capital and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Arosa Capital Management allocated the biggest weight to Cactus, Inc. (NYSE:WHD), around 4% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, dishing out 2.41 percent of its 13F equity portfolio to WHD.

Seeing as Cactus, Inc. (NYSE:WHD) has faced falling interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of fund managers who were dropping their entire stakes in the third quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management sold off the biggest position of the 750 funds followed by Insider Monkey, comprising an estimated $5 million in stock, and Richard Driehaus’s Driehaus Capital was right behind this move, as the fund said goodbye to about $2.1 million worth. These moves are interesting, as total hedge fund interest dropped by 2 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Cactus, Inc. (NYSE:WHD) but similarly valued. These stocks are Grupo Aeroportuario del Centro Nort (NASDAQ:OMAB), Appian Corporation (NASDAQ:APPN), Weight Watchers International, Inc. (NASDAQ:WW), and AAON, Inc. (NASDAQ:AAON). All of these stocks’ market caps match WHD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OMAB 6 67651 -1
APPN 17 380631 -2
WW 37 514487 6
AAON 7 11949 0
Average 16.75 243680 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $244 million. That figure was $141 million in WHD’s case. Weight Watchers International, Inc. (NASDAQ:WW) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Centro Nort (NASDAQ:OMAB) is the least popular one with only 6 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. 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 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately WHD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on WHD were disappointed as the stock returned -63% during the same time period 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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