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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Wayfair Inc (NYSE:W) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Wayfair Inc (NYSE:W) a buy, sell, or hold? Investors who are in the know are selling. The number of long hedge fund bets went down by 1 in recent months. Our calculations also showed that W isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). W was in 33 hedge funds' portfolios at the end of December. There were 34 hedge funds in our database with W holdings 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' 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 S&P 500 ETFs by 41 percentage points since March 2017 (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.
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David E. Shaw of D.E. Shaw[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind we're going to take a gander at the key hedge fund action surrounding Wayfair Inc (NYSE:W).
How have hedgies been trading Wayfair Inc (NYSE:W)?
Heading into the first quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the third quarter of 2019. By comparison, 28 hedge funds held shares or bullish call options in W a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Spruce House Investment Management, managed by Zachary Sternberg and Benjamin Stein, holds the biggest position in Wayfair Inc (NYSE:W). Spruce House Investment Management has a $632.6 million position in the stock, comprising 20.7% of its 13F portfolio. On Spruce House Investment Management's heels is Brian Bares of Bares Capital Management, with a $398.8 million position; the fund has 11.2% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish consist of Alex Sacerdote's Whale Rock Capital Management, Nancy Zevenbergen's Zevenbergen Capital Investments and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position Spruce House Investment Management allocated the biggest weight to Wayfair Inc (NYSE:W), around 20.65% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, dishing out 11.18 percent of its 13F equity portfolio to W.
Because Wayfair Inc (NYSE:W) has faced falling interest from hedge fund managers, it's easy to see that there is a sect of funds that elected to cut their positions entirely in the third quarter. It's worth mentioning that Doug Silverman and Alexander Klabin's Senator Investment Group said goodbye to the largest position of all the hedgies followed by Insider Monkey, valued at close to $128.9 million in stock. Chase Coleman's fund, Tiger Global Management LLC, also cut its stock, about $57.2 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds in the third quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Wayfair Inc (NYSE:W) but similarly valued. These stocks are Service Corporation International (NYSE:SCI), Bio-Techne Corporation (NASDAQ:TECH), Alaska Air Group, Inc. (NYSE:ALK), and Brookfield Renewable Partners L.P. (NYSE:BEP). This group of stocks' market caps are similar to W's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SCI,18,320390,-2 TECH,26,266703,5 ALK,39,627119,4 BEP,4,11244,0 Average,21.75,306364,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $306 million. That figure was $1500 million in W's case. Alaska Air Group, Inc. (NYSE:ALK) is the most popular stock in this table. On the other hand Brookfield Renewable Partners L.P. (NYSE:BEP) is the least popular one with only 4 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. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 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 -66.3% during the same time period and underperformed 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.
Disclosure: None. This article was originally published at Insider Monkey.