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Were Hedge Funds Right About Western Digital Corporation (WDC)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Western Digital Corporation (NASDAQ:WDC) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Western Digital Corporation (NASDAQ:WDC) a buy, sell, or hold? Prominent investors were turning less bullish. The number of long hedge fund positions were trimmed by 4 recently. Our calculations also showed that WDC 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). WDC was in 45 hedge funds’ portfolios at the end of March. There were 49 hedge funds in our database with WDC positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

If you’d ask most traders, hedge funds are assumed to be underperforming, old investment vehicles of the past. While there are greater than 8000 funds in operation at the moment, We hone in on the leaders of this group, approximately 850 funds. These hedge fund managers orchestrate most of all hedge funds’ total asset base, and by tailing their matchless equity investments, Insider Monkey has formulated a number of investment strategies that have historically exceeded the broader indices. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points annually 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 .

Harold Levy Iridian Asset Management

Harold Levy of Iridian Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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 let’s take a look at the fresh hedge fund action encompassing Western Digital Corporation (NASDAQ:WDC).

What have hedge funds been doing with Western Digital Corporation (NASDAQ:WDC)?

At the end of the first quarter, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in WDC over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Lyrical Asset Management was the largest shareholder of Western Digital Corporation (NASDAQ:WDC), with a stake worth $174.2 million reported as of the end of September. Trailing Lyrical Asset Management was Citadel Investment Group, which amassed a stake valued at $63.2 million. Citadel Investment Group, Iridian Asset Management, and Point72 Asset 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 Lyrical Asset Management allocated the biggest weight to Western Digital Corporation (NASDAQ:WDC), around 4.28% of its 13F portfolio. Mondrian Capital is also relatively very bullish on the stock, earmarking 4.03 percent of its 13F equity portfolio to WDC.

Judging by the fact that Western Digital Corporation (NASDAQ:WDC) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there exists a select few money managers who were dropping their positions entirely last quarter. It’s worth mentioning that Lee Ainslie’s Maverick Capital cut the biggest position of all the hedgies monitored by Insider Monkey, totaling close to $39.4 million in stock. John Hurley’s fund, Cavalry Asset Management, also said goodbye to its stock, about $26.3 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Western Digital Corporation (NASDAQ:WDC) but similarly valued. We will take a look at Extra Space Storage, Inc. (NYSE:EXR), Energy Transfer L.P. (NYSE:ET), Wheaton Precious Metals Corp. (NYSE:WPM), and Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY). All of these stocks’ market caps resemble WDC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EXR 16 186130 -12
ET 33 421900 -3
WPM 25 545094 -5
ALNY 34 840647 1
Average 27 498443 -4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $498 million. That figure was $560 million in WDC’s case. Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) is the most popular stock in this table. On the other hand Extra Space Storage, Inc. (NYSE:EXR) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Western Digital Corporation (NASDAQ:WDC) 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 WDC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on WDC were disappointed as the stock returned 7.5% 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.