"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Washington Federal Inc. (NASDAQ:WAFD) and see how it was affected.
Washington Federal Inc. (NASDAQ:WAFD) shareholders have witnessed a decrease in enthusiasm from smart money lately. WAFD was in 9 hedge funds' portfolios at the end of the second quarter of 2019. There were 15 hedge funds in our database with WAFD positions at the end of the previous quarter. Our calculations also showed that WAFD isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. Let's take a peek at the latest hedge fund action surrounding Washington Federal Inc. (NASDAQ:WAFD).
How are hedge funds trading Washington Federal Inc. (NASDAQ:WAFD)?
At the end of the second quarter, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -40% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in WAFD a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Washington Federal Inc. (NASDAQ:WAFD), which was worth $19.7 million at the end of the second quarter. On the second spot was Arrowstreet Capital which amassed $18.6 million worth of shares. Moreover, Citadel Investment Group, GLG Partners, and Balyasny Asset Management were also bullish on Washington Federal Inc. (NASDAQ:WAFD), allocating a large percentage of their portfolios to this stock.
Because Washington Federal Inc. (NASDAQ:WAFD) has faced declining sentiment from hedge fund managers, we can see that there was a specific group of hedgies that decided to sell off their full holdings last quarter. Intriguingly, David Harding's Winton Capital Management dropped the biggest investment of all the hedgies followed by Insider Monkey, comprising about $11.1 million in stock, and Paul Tudor Jones's Tudor Investment Corp was right behind this move, as the fund dropped about $0.9 million worth. These moves are important to note, as aggregate hedge fund interest fell by 6 funds last quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Washington Federal Inc. (NASDAQ:WAFD) but similarly valued. These stocks are Finisar Corporation (NASDAQ:FNSR), Nextera Energy Partners LP (NYSE:NEP), Liberty Expedia Holdings, Inc. (NASDAQ:LEXEA), and Covetrus, Inc. (NASDAQ:CVET). This group of stocks' market caps resemble WAFD's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FNSR,15,354017,1 NEP,13,51281,4 LEXEA,30,381843,1 CVET,20,426961,2 Average,19.5,303526,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $304 million. That figure was $60 million in WAFD's case. Liberty Expedia Holdings, Inc. (NASDAQ:LEXEA) is the most popular stock in this table. On the other hand Nextera Energy Partners LP (NYSE:NEP) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Washington Federal Inc. (NASDAQ:WAFD) is even less popular than NEP. Hedge funds clearly dropped the ball on WAFD as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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 WAFD as the stock returned 6.5% during the third quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.