Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before 2018's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Western Alliance Bancorporation (NYSE:WAL) changed recently.
Is Western Alliance Bancorporation (NYSE:WAL) a good investment today? The best stock pickers are getting less bullish. The number of bullish hedge fund positions were cut by 2 recently. Our calculations also showed that WAL 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). WAL was in 25 hedge funds' portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with WAL positions at the end of the previous quarter.
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_27676" align="aligncenter" width="355"] Israel Englander of Millennium Management[/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 we're going to take a peek at the fresh hedge fund action encompassing Western Alliance Bancorporation (NYSE:WAL).
What does smart money think about Western Alliance Bancorporation (NYSE:WAL)?
At Q3's end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in WAL over the last 17 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Western Alliance Bancorporation (NYSE:WAL), with a stake worth $56.9 million reported as of the end of September. Trailing Citadel Investment Group was Arrowstreet Capital, which amassed a stake valued at $40 million. Millennium Management, Two Sigma Advisors, and Castine Capital Management 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 Castine Capital Management allocated the biggest weight to Western Alliance Bancorporation (NYSE:WAL), around 4.03% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, earmarking 1.53 percent of its 13F equity portfolio to WAL.
Because Western Alliance Bancorporation (NYSE:WAL) has faced falling interest from hedge fund managers, it's safe to say that there was a specific group of hedge funds that elected to cut their positions entirely by the end of the third quarter. It's worth mentioning that Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital cut the biggest position of the "upper crust" of funds monitored by Insider Monkey, valued at an estimated $22.3 million in stock, and David E. Shaw's D E Shaw was right behind this move, as the fund cut about $3.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut 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 Western Alliance Bancorporation (NYSE:WAL) but similarly valued. We will take a look at Shell Midstream Partners LP (NYSE:SHLX), PLDT Inc. (NYSE:PHI), Grand Canyon Education Inc (NASDAQ:LOPE), and Micro Focus Intl PLC (NYSE:MFGP). This group of stocks' market valuations resemble WAL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SHLX,6,12026,1 PHI,5,71651,0 LOPE,23,107964,0 MFGP,6,21086,0 Average,10,53182,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $255 million in WAL's case. Grand Canyon Education Inc (NASDAQ:LOPE) is the most popular stock in this table. On the other hand PLDT Inc. (NYSE:PHI) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Western Alliance Bancorporation (NYSE:WAL) is more popular among hedge funds. 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. Hedge funds were also right about betting on WAL as the stock returned 45.9% in 2019 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.