Were Hedge Funds Right About Souring On Waterstone Financial, Inc. (WSBF)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Waterstone Financial, Inc. (NASDAQ:WSBF) and determine whether hedge funds skillfully traded this stock.

Waterstone Financial, Inc. (NASDAQ:WSBF) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. Our calculations also showed that WSBF 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.

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 S&P 500 ETFs by more than 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. 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.

Michael Price MFP Investors

Michael Price of MFP Investors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to analyze the key hedge fund action regarding Waterstone Financial, Inc. (NASDAQ:WSBF).

How are hedge funds trading Waterstone Financial, Inc. (NASDAQ:WSBF)?

Heading into the second quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WSBF over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Waterstone Financial, Inc. (NASDAQ:WSBF), with a stake worth $30.1 million reported as of the end of September. Trailing Renaissance Technologies was MFP Investors, which amassed a stake valued at $12.4 million. Stadium Capital Management, Driehaus Capital, and Prospector Partners 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 Stadium Capital Management allocated the biggest weight to Waterstone Financial, Inc. (NASDAQ:WSBF), around 4.06% of its 13F portfolio. MFP Investors is also relatively very bullish on the stock, earmarking 2.51 percent of its 13F equity portfolio to WSBF.

Because Waterstone Financial, Inc. (NASDAQ:WSBF) has experienced a decline in interest from hedge fund managers, we can see that there exists a select few hedgies who sold off their full holdings by the end of the first quarter. Interestingly, D. E. Shaw’s D E Shaw dumped the largest stake of all the hedgies followed by Insider Monkey, comprising close to $0.4 million in stock, and Bruce Kovner’s Caxton Associates LP was right behind this move, as the fund said goodbye to about $0.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 1 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Waterstone Financial, Inc. (NASDAQ:WSBF). These stocks are Alliance Resource Partners, L.P. (NASDAQ:ARLP), UP Fintech Holding Limited (NASDAQ:TIGR), Heritage-Crystal Clean, Inc. (NASDAQ:HCCI), and Luxfer Holdings PLC (NYSE:LXFR). All of these stocks’ market caps match WSBF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARLP 4 20224 0
TIGR 2 162 -1
HCCI 8 35905 -1
LXFR 9 95544 -1
Average 5.75 37959 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.75 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $64 million in WSBF’s case. Luxfer Holdings PLC (NYSE:LXFR) is the most popular stock in this table. On the other hand UP Fintech Holding Limited (NASDAQ:TIGR) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Waterstone Financial, Inc. (NASDAQ:WSBF) is more popular among hedge funds. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately WSBF wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on WSBF were disappointed as the stock returned 2.9% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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