We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Evoqua Water Technologies Corp. (NYSE:AQUA).
Is AQUA a good stock to buy now? Evoqua Water Technologies Corp. (NYSE:AQUA) investors should be aware of an increase in enthusiasm from smart money recently. Evoqua Water Technologies Corp. (NYSE:AQUA) was in 21 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 28. Our calculations also showed that AQUA isn't among the 30 most popular stocks among hedge funds (click for Q3 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 66 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.
Richard Driehaus of Driehaus Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let's go over the recent hedge fund action surrounding Evoqua Water Technologies Corp. (NYSE:AQUA).
Do Hedge Funds Think AQUA Is A Good Stock To Buy Now?
At the end of the third quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in AQUA over the last 21 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Claus Moller's P2 Capital Partners has the most valuable position in Evoqua Water Technologies Corp. (NYSE:AQUA), worth close to $92.2 million, corresponding to 7.2% of its total 13F portfolio. Coming in second is Impax Asset Management, managed by Ian Simm, which holds a $62.7 million position; 0.5% of its 13F portfolio is allocated to the company. Remaining peers that are bullish include Renaissance Technologies, Joseph Samuels's Islet Management and Paul Marshall and Ian Wace's Marshall Wace LLP. In terms of the portfolio weights assigned to each position P2 Capital Partners allocated the biggest weight to Evoqua Water Technologies Corp. (NYSE:AQUA), around 7.21% of its 13F portfolio. Jade Capital Advisors is also relatively very bullish on the stock, designating 1.22 percent of its 13F equity portfolio to AQUA.
As one would reasonably expect, key money managers have been driving this bullishness. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, created the biggest position in Evoqua Water Technologies Corp. (NYSE:AQUA). Marshall Wace LLP had $5.8 million invested in the company at the end of the quarter. Richard Driehaus's Driehaus Capital also made a $4.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Michael Gelband's ExodusPoint Capital, and Joel Greenblatt's Gotham Asset Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Evoqua Water Technologies Corp. (NYSE:AQUA) but similarly valued. We will take a look at Cimarex Energy Co (NYSE:XEC), Pluralsight, Inc. (NASDAQ:PS), Teradata Corporation (NYSE:TDC), Opko Health Inc. (NASDAQ:OPK), Sprouts Farmers Market Inc (NASDAQ:SFM), J&J Snack Foods Corp. (NASDAQ:JJSF), and Spectrum Brands Holdings, Inc. (NYSE:SPB). This group of stocks' market valuations match AQUA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XEC,38,563605,-1 PS,24,183954,-3 TDC,33,342569,2 OPK,11,26649,-5 SFM,27,427544,2 JJSF,16,70677,-1 SPB,38,380230,12 Average,26.7,285033,0.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $285 million. That figure was $216 million in AQUA's case. Cimarex Energy Co (NYSE:XEC) is the most popular stock in this table. On the other hand Opko Health Inc. (NASDAQ:OPK) is the least popular one with only 11 bullish hedge fund positions. Evoqua Water Technologies Corp. (NYSE:AQUA) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for AQUA is 50. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and surpassed the market again by 15.8 percentage points. Unfortunately AQUA wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AQUA investors were disappointed as the stock returned 7.2% since the end of September (through 12/14) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 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.