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Did Hedge Funds Drop The Ball On Western Digital Corporation (WDC) ?

Reymerlyn Martin

How do we determine whether Western Digital Corporation (NASDAQ:WDC) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

Is Western Digital Corporation (NASDAQ:WDC) a buy here? Prominent investors are turning less bullish. The number of long hedge fund positions decreased by 8 lately. Our calculations also showed that WDC isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Daniel Gold QVT Financial

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to check out the recent hedge fund action regarding Western Digital Corporation (NASDAQ:WDC).

How have hedgies been trading Western Digital Corporation (NASDAQ:WDC)?

At Q2's end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -24% from one quarter earlier. By comparison, 43 hedge funds held shares or bullish call options in WDC a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

WDC_oct2019

Of the funds tracked by Insider Monkey, Iridian Asset Management, managed by David Cohen and Harold Levy, holds the biggest position in Western Digital Corporation (NASDAQ:WDC). Iridian Asset Management has a $197.7 million position in the stock, comprising 2.9% of its 13F portfolio. The second largest stake is held by Renaissance Technologies, holding a $136.5 million position; 0.1% of its 13F portfolio is allocated to the stock. Some other professional money managers that are bullish comprise Ken Griffin's Citadel Investment Group, Matthew Hulsizer's PEAK6 Capital Management and Brandon Haley's Holocene Advisors.

Since Western Digital Corporation (NASDAQ:WDC) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there were a few hedge funds that slashed their full holdings in the second quarter. It's worth mentioning that Leon Shaulov's Maplelane Capital dumped the largest stake of the 750 funds watched by Insider Monkey, totaling close to $50.2 million in stock, and Steve Cohen's Point72 Asset Management was right behind this move, as the fund sold off about $23.1 million worth. These moves are important to note, as total hedge fund interest dropped by 8 funds in the second quarter.

Let's now review 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 Cardinal Health, Inc. (NYSE:CAH), Korea Electric Power Corporation (NYSE:KEP), CrowdStrike Holdings, Inc. (NASDAQ:CRWD), and Skyworks Solutions Inc (NASDAQ:SWKS). All of these stocks' market caps are similar to WDC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CAH,28,764540,2 KEP,7,43572,-3 CRWD,41,343926,41 SWKS,31,734317,-7 Average,26.75,471589,8.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $472 million. That figure was $500 million in WDC's case. CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is the most popular stock in this table. On the other hand Korea Electric Power Corporation (NYSE:KEP) is the least popular one with only 7 bullish hedge fund positions. Western Digital Corporation (NASDAQ:WDC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on WDC as the stock returned 25.4% during the same time frame and outperformed the market by an even larger margin.

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

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