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How Did Wayfair Inc (W) Compare Against Top Hedge Fund Stocks in 2019?

Reymerlyn Martin

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Wayfair Inc (NYSE:W).

Wayfair Inc (NYSE:W) was in 30 hedge funds' portfolios at the end of the third quarter of 2019. W investors should be aware of a decrease in activity from the world's largest hedge funds recently. There were 32 hedge funds in our database with W holdings at the end of the previous quarter. Our calculations also showed that W isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_26088" align="aligncenter" width="600"] Chase Coleman of Tiger Global[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let's analyze the latest hedge fund action regarding Wayfair Inc (NYSE:W).

What have hedge funds been doing with Wayfair Inc (NYSE:W)?

Heading into the fourth quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the second quarter of 2019. By comparison, 30 hedge funds held shares or bullish call options in W 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.

The largest stake in Wayfair Inc (NYSE:W) was held by Spruce House Investment Management, which reported holding $476.5 million worth of stock at the end of September. It was followed by Bares Capital Management with a $269.3 million position. Other investors bullish on the company included Whale Rock Capital Management, D E Shaw, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Spruce House Investment Management allocated the biggest weight to Wayfair Inc (NYSE:W), around 17.24% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, dishing out 8.08 percent of its 13F equity portfolio to W.

Because Wayfair Inc (NYSE:W) has witnessed bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of money managers who were dropping their full holdings by the end of the third quarter. At the top of the heap, Robert Pohly's Samlyn Capital dropped the biggest position of the "upper crust" of funds tracked by Insider Monkey, comprising close to $68.8 million in call options, and Leon Shaulov's Maplelane Capital was right behind this move, as the fund sold off about $21.9 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Wayfair Inc (NYSE:W) but similarly valued. We will take a look at Federal Realty Investment Trust (NYSE:FRT), Mylan N.V. (NASDAQ:MYL), Brown & Brown, Inc. (NYSE:BRO), and Tyler Technologies, Inc. (NYSE:TYL). This group of stocks' market valuations resemble W's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FRT,22,146584,-1 MYL,33,1718513,3 BRO,28,810178,7 TYL,26,602875,2 Average,27.25,819538,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $820 million. That figure was $1831 million in W's case. Mylan N.V. (NASDAQ:MYL) is the most popular stock in this table. On the other hand Federal Realty Investment Trust (NYSE:FRT) is the least popular one with only 22 bullish hedge fund positions. Wayfair Inc (NYSE:W) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately W wasn't nearly as popular as these 20 stocks and hedge funds that were betting on W were disappointed as the stock returned 0.3% in 2019 and trailed 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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