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Were Hedge Funds Right About Souring On Wells Fargo & Company (WFC)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Wells Fargo & Company (NYSE:WFC) and determine whether the smart money was really smart about this stock.

Wells Fargo & Company (NYSE:WFC) has experienced a decrease in activity from the world’s largest hedge funds of late. WFC was in 76 hedge funds’ portfolios at the end of the first quarter of 2020. There were 79 hedge funds in our database with WFC positions at the end of the previous quarter. Our calculations also showed that WFC 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.

According to most market participants, hedge funds are assumed to be underperforming, outdated financial vehicles of the past. While there are greater than 8000 funds with their doors open today, Our experts look at the upper echelon of this club, around 850 funds. Most estimates calculate that this group of people administer most of the hedge fund industry’s total capital, and by tailing their best picks, Insider Monkey has found many investment strategies that have historically exceeded the market. Insider Monkey’s flagship short hedge fund strategy outrun the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

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 go over the fresh hedge fund action encompassing Wells Fargo & Company (NYSE:WFC).

What have hedge funds been doing with Wells Fargo & Company (NYSE:WFC)?

Heading into the second quarter of 2020, a total of 76 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards WFC 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.

Among these funds, Berkshire Hathaway held the most valuable stake in Wells Fargo & Company (NYSE:WFC), which was worth $9276.2 million at the end of the third quarter. On the second spot was Eagle Capital Management which amassed $830.7 million worth of shares. Arrowstreet Capital, Theleme Partners, and Pzena Investment 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 Magnolia Capital Fund allocated the biggest weight to Wells Fargo & Company (NYSE:WFC), around 28.75% of its 13F portfolio. Theleme Partners is also relatively very bullish on the stock, dishing out 22.77 percent of its 13F equity portfolio to WFC.

Judging by the fact that Wells Fargo & Company (NYSE:WFC) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there were a few money managers that slashed their entire stakes by the end of the first quarter. Intriguingly, Robert M. P. Luciano’s VGI Partners dumped the biggest stake of the 750 funds watched by Insider Monkey, valued at an estimated $89.1 million in stock, and Ray Dalio’s Bridgewater Associates was right behind this move, as the fund dropped about $47.5 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to Wells Fargo & Company (NYSE:WFC). These stocks are AstraZeneca plc (NYSE:AZN), HSBC Holdings plc (NYSE:HSBC), Philip Morris International Inc. (NYSE:PM), and Thermo Fisher Scientific Inc. (NYSE:TMO). This group of stocks’ market caps match WFC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AZN 26 1772166 -6
HSBC 14 378656 -4
PM 48 2541197 -9
TMO 80 3187947 7
Average 42 1969992 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 42 hedge funds with bullish positions and the average amount invested in these stocks was $1970 million. That figure was $12935 million in WFC’s case. Thermo Fisher Scientific Inc. (NYSE:TMO) is the most popular stock in this table. On the other hand HSBC Holdings plc (NYSE:HSBC) is the least popular one with only 14 bullish hedge fund positions. Wells Fargo & Company (NYSE:WFC) 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 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately WFC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on WFC were disappointed as the stock returned -2.7% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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