Were Hedge Funds Right About Souring On Watsco Inc (WSO)?

Is Watsco Inc (NYSE:WSO) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before doing days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Watsco Inc (NYSE:WSO) a buy, sell, or hold? Money managers are becoming less hopeful. The number of long hedge fund positions dropped by 3 in recent months. Our calculations also showed that WSO isn’t among the 30 most popular stocks among hedge funds.

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 flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

We’re going to go over the recent hedge fund action encompassing Watsco Inc (NYSE:WSO).

What have hedge funds been doing with Watsco Inc (NYSE:WSO)?

Heading into the first quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards WSO over the last 14 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).


Among these funds, Markel Gayner Asset Management held the most valuable stake in Watsco Inc (NYSE:WSO), which was worth $41 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $29.3 million worth of shares. Moreover, Citadel Investment Group, Millennium Management, and D E Shaw were also bullish on Watsco Inc (NYSE:WSO), allocating a large percentage of their portfolios to this stock.

Due to the fact that Watsco Inc (NYSE:WSO) has witnessed falling interest from the smart money, it’s safe to say that there were a few hedge funds that elected to cut their entire stakes heading into Q3. Interestingly, Greg Poole’s Echo Street Capital Management cut the largest position of the “upper crust” of funds monitored by Insider Monkey, comprising close to $40.2 million in stock, and Ilya Boroditsky’s Precision Path Capital was right behind this move, as the fund dropped about $4.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 3 funds heading into Q3.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Watsco Inc (NYSE:WSO) but similarly valued. These stocks are Companhia Energetica Minas Gerais (NYSE:CIG), James Hardie Industries plc (NYSE:JHX), Logitech International SA (NASDAQ:LOGI), and Haemonetics Corporation (NYSE:HAE). This group of stocks’ market values are closest to WSO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CIG 7 13598 1
JHX 2 3804 0
LOGI 14 160893 -5
HAE 20 566902 -2
Average 10.75 186299 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $186 million. That figure was $135 million in WSO’s case. Haemonetics Corporation (NYSE:HAE) is the most popular stock in this table. On the other hand James Hardie Industries plc (NYSE:JHX) is the least popular one with only 2 bullish hedge fund positions. Watsco Inc (NYSE:WSO) 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately WSO wasn’t in this group. Hedge funds that bet on WSO were disappointed as the stock returned 7.9% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.

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