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Were Hedge Funds Right About Westport Fuel Systems Inc. (WPRT)?

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 Westport Fuel Systems Inc. (NASDAQ:WPRT) and determine whether hedge funds skillfully traded this stock.

Westport Fuel Systems Inc. (NASDAQ:WPRT) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 13 hedge funds’ portfolios at the end of the first quarter of 2020. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Alta Equipment Group Inc. (NYSE:ALTG), PC Tel Inc (NASDAQ:PCTI), and RTI Surgical Holdings, Inc. (NASDAQ:RTIX) to gather more data points. Our calculations also showed that WPRT 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.

Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 states that pay the most federal taxes to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind let’s check out the latest hedge fund action encompassing Westport Fuel Systems Inc. (NASDAQ:WPRT).

What have hedge funds been doing with Westport Fuel Systems Inc. (NASDAQ:WPRT)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in WPRT a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Among these funds, Royce & Associates held the most valuable stake in Westport Fuel Systems Inc. (NASDAQ:WPRT), which was worth $5.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $3.3 million worth of shares. Manatuck Hill Partners, Millennium Management, and G2 Investment Partners 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 Manatuck Hill Partners allocated the biggest weight to Westport Fuel Systems Inc. (NASDAQ:WPRT), around 0.79% of its 13F portfolio. Trellus Management Company is also relatively very bullish on the stock, designating 0.66 percent of its 13F equity portfolio to WPRT.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Ardsley Partners. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Trellus Management Company).

Let’s now take a look at hedge fund activity in other stocks similar to Westport Fuel Systems Inc. (NASDAQ:WPRT). These stocks are Alta Equipment Group Inc. (NYSE:ALTG), PC Tel Inc (NASDAQ:PCTI), RTI Surgical Holdings, Inc. (NASDAQ:RTIX), and Oxford Square Capital Corp. (NASDAQ:OXSQ). This group of stocks’ market caps are closest to WPRT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALTG 20 23486 10
PCTI 11 22662 -7
RTIX 10 11461 -3
OXSQ 6 2487 -1
Average 11.75 15024 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $13 million in WPRT’s case. Alta Equipment Group Inc. (NYSE:ALTG) is the most popular stock in this table. On the other hand Oxford Square Capital Corp. (NASDAQ:OXSQ) is the least popular one with only 6 bullish hedge fund positions. Westport Fuel Systems Inc. (NASDAQ:WPRT) is not the most popular stock in this group but hedge fund interest is still above average. 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 still beat the market by 16.8 percentage points. Hedge funds were also right about betting on WPRT as the stock returned 27.7% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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