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Hedge Funds Are Coming Back To Watsco Inc (WSO)

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·5 min read
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While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March, 2020 and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Watsco Inc (NYSE:WSO).

Watsco Inc (NYSE:WSO) was in 26 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 29. WSO investors should be aware of an increase in support from the world's most elite money managers in recent months. There were 22 hedge funds in our database with WSO positions at the end of the first quarter. Our calculations also showed that WSO isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Today there are many tools investors have at their disposal to grade publicly traded companies. Some of the most innovative tools are hedge fund and insider trading indicators. Our researchers have shown that, historically, those who follow the best picks of the top investment managers can outclass their index-focused peers by a superb margin (see the details here). Also, our monthly newsletter's portfolio of long stock picks returned 185.4% since March 2017 (through August 2021) and beat the S&P 500 Index by more than 79 percentage points. You can download a sample issue of this newsletter on our website.

Tom Gayner
Tom Gayner

Tom Gayner of Markel Gayner Asset Management

With all of this in mind we're going to take a glance at the fresh hedge fund action surrounding Watsco Inc (NYSE:WSO).

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

Heading into the third quarter of 2021, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 18% from the first quarter of 2020. By comparison, 21 hedge funds held shares or bullish call options in WSO a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Watsco Inc (NYSE:WSO) was held by Markel Gayner Asset Management, which reported holding $116.5 million worth of stock at the end of June. It was followed by Motley Fool Asset Management with a $52.5 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and Sandler Capital Management. In terms of the portfolio weights assigned to each position Motley Fool Asset Management allocated the biggest weight to Watsco Inc (NYSE:WSO), around 3.47% of its 13F portfolio. Markel Gayner Asset Management is also relatively very bullish on the stock, dishing out 1.49 percent of its 13F equity portfolio to WSO.

As one would reasonably expect, key hedge funds have jumped into Watsco Inc (NYSE:WSO) headfirst. Sandler Capital Management, managed by Andrew Sandler, assembled the biggest position in Watsco Inc (NYSE:WSO). Sandler Capital Management had $16.6 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $7 million investment in the stock during the quarter. The other funds with brand new WSO positions are D. E. Shaw's D E Shaw, Peter Algert's Algert Global, and Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors.

Let's check out hedge fund activity in other stocks similar to Watsco Inc (NYSE:WSO). We will take a look at Virgin Galactic Holdings, Inc. (NYSE:SPCE), Bunge Limited (NYSE:BG), Qiagen NV (NYSE:QGEN), Morningstar, Inc. (NASDAQ:MORN), CF Industries Holdings, Inc. (NYSE:CF), Intellia Therapeutics, Inc. (NASDAQ:NTLA), and Darling Ingredients Inc. (NYSE:DAR). This group of stocks' market valuations match WSO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPCE,18,181423,1 BG,40,399239,-4 QGEN,22,482750,-5 MORN,24,1459482,-1 CF,47,955523,3 NTLA,41,2282192,12 DAR,41,839147,8 Average,33.3,942822,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $943 million. That figure was $306 million in WSO's case. CF Industries Holdings, Inc. (NYSE:CF) is the most popular stock in this table. On the other hand Virgin Galactic Holdings, Inc. (NYSE:SPCE) is the least popular one with only 18 bullish hedge fund positions. Watsco Inc (NYSE:WSO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for WSO is 49.7. 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 negative signal and 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 surpassed the market again by 4.5 percentage points. Unfortunately WSO wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); WSO investors were disappointed as the stock returned 0.9% 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 most of these stocks already outperformed the market in 2021.

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