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Is Evoqua Water Technologies Corp. (AQUA) A Good Stock To Buy?

Abigail Fisher

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Evoqua Water Technologies Corp. (NYSE:AQUA).

Evoqua Water Technologies Corp. (NYSE:AQUA) was in 14 hedge funds' portfolios at the end of the third quarter of 2019. AQUA shareholders have witnessed an increase in hedge fund sentiment in recent months. There were 13 hedge funds in our database with AQUA holdings at the end of the previous quarter. 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_687238" align="aligncenter" width="473"] Philip Hempleman of Ardsley Partners[/caption]

Philip Hempleman Ardsley Partners

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. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to view the recent hedge fund action surrounding Evoqua Water Technologies Corp. (NYSE:AQUA).

How have hedgies been trading Evoqua Water Technologies Corp. (NYSE:AQUA)?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AQUA over the last 17 quarters. With hedge funds' sentiment swirling, there exists a few notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Among these funds, P2 Capital Partners held the most valuable stake in Evoqua Water Technologies Corp. (NYSE:AQUA), which was worth $91.4 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $20.8 million worth of shares. D E Shaw, Millennium Management, and Ardsley Partners 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 P2 Capital Partners allocated the biggest weight to Evoqua Water Technologies Corp. (NYSE:AQUA), around 6.18% of its 13F portfolio. Concourse Capital Management is also relatively very bullish on the stock, setting aside 2.51 percent of its 13F equity portfolio to AQUA.

As aggregate interest increased, some big names were leading the bulls' herd. PDT Partners, managed by Peter Muller, established the biggest position in Evoqua Water Technologies Corp. (NYSE:AQUA). PDT Partners had $1.2 million invested in the company at the end of the quarter. Hoon Kim's Quantinno Capital also initiated a $0.4 million position during the quarter. The other funds with new positions in the stock are Matthew Hulsizer's PEAK6 Capital Management, Donald Sussman's Paloma Partners, and Matthew Hulsizer's PEAK6 Capital Management.

Let's check out 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 Cal-Maine Foods Inc (NASDAQ:CALM), Avon Products, Inc. (NYSE:AVP), Cleveland-Cliffs Inc (NYSE:CLF), and PennyMac Mortgage Investment Trust (NYSE:PMT). All of these stocks' market caps resemble AQUA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CALM,20,184662,4 AVP,21,314685,3 CLF,26,297021,-2 PMT,13,74959,-1 Average,20,217832,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $218 million. That figure was $151 million in AQUA's case. Cleveland-Cliffs Inc (NYSE:CLF) is the most popular stock in this table. On the other hand PennyMac Mortgage Investment Trust (NYSE:PMT) is the least popular one with only 13 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 calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on AQUA as the stock returned 11.3% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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