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Should I Avoid Advanced Drainage Systems Inc. (WMS)?

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In this article we will check out the progression of hedge fund sentiment towards Advanced Drainage Systems Inc. (NYSE:WMS) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending 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 employ 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.

Advanced Drainage Systems Inc. (NYSE:WMS) investors should pay attention to a decrease in activity from the world's largest hedge funds recently. Advanced Drainage Systems Inc. (NYSE:WMS) was in 26 hedge funds' portfolios at the end of June. The all time high for this statistic is 29. There were 29 hedge funds in our database with WMS holdings at the end of March. Our calculations also showed that WMS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Robert Atchinson of Adage Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we're going to view the fresh hedge fund action regarding Advanced Drainage Systems Inc. (NYSE:WMS).

Do Hedge Funds Think WMS Is A Good Stock To Buy Now?

At the end of June, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the first quarter of 2020. On the other hand, there were a total of 24 hedge funds with a bullish position in WMS a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Robert Joseph Caruso's Select Equity Group has the biggest position in Advanced Drainage Systems Inc. (NYSE:WMS), worth close to $414.3 million, accounting for 1.4% of its total 13F portfolio. Sitting at the No. 2 spot is Stockbridge Partners, managed by Sharlyn C. Heslam, which holds a $363.9 million position; 7.7% of its 13F portfolio is allocated to the company. Remaining peers that are bullish contain Ian Simm's Impax Asset Management, Richard Merage's MIG Capital and Israel Englander's Millennium Management. In terms of the portfolio weights assigned to each position Stockbridge Partners allocated the biggest weight to Advanced Drainage Systems Inc. (NYSE:WMS), around 7.74% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, earmarking 4.8 percent of its 13F equity portfolio to WMS.

Judging by the fact that Advanced Drainage Systems Inc. (NYSE:WMS) has experienced a decline in interest from hedge fund managers, it's easy to see that there were a few funds that elected to cut their positions entirely last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital said goodbye to the biggest position of all the hedgies followed by Insider Monkey, comprising an estimated $12.2 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund dumped about $4.7 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Advanced Drainage Systems Inc. (NYSE:WMS) but similarly valued. These stocks are Arrow Electronics, Inc. (NYSE:ARW), Polaris Inc. (NYSE:PII), Life Storage, Inc. (NYSE:LSI), Mirati Therapeutics, Inc. (NASDAQ:MRTX), TELUS International (Cda) Inc. (NYSE:TIXT), Concentrix Corporation (NASDAQ:CNXC), and National Retail Properties, Inc. (NYSE:NNN). All of these stocks' market caps match WMS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARW,30,711641,7 PII,20,464211,-9 LSI,21,261561,-5 MRTX,55,2790783,-2 TIXT,6,19229,-4 CNXC,21,601344,-2 NNN,19,188064,-3 Average,24.6,719548,-2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.6 hedge funds with bullish positions and the average amount invested in these stocks was $720 million. That figure was $1337 million in WMS's case. Mirati Therapeutics, Inc. (NASDAQ:MRTX) is the most popular stock in this table. On the other hand TELUS International (Cda) Inc. (NYSE:TIXT) is the least popular one with only 6 bullish hedge fund positions. Advanced Drainage Systems Inc. (NYSE:WMS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WMS is 49.3. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and beat the market again by 4.5 percentage points. Unfortunately WMS wasn't nearly as popular as these 5 stocks and hedge funds that were betting on WMS were disappointed as the stock returned -3% since the end of June (through 10/15) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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