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Hedge Funds Are Souring On Evoqua Water Technologies Corp. (AQUA)

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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Evoqua Water Technologies Corp. (NYSE:AQUA).

Is Evoqua Water Technologies Corp. (NYSE:AQUA) a buy here? Investors who are in the know were getting less bullish. The number of bullish hedge fund bets fell by 3 recently. Evoqua Water Technologies Corp. (NYSE:AQUA) was in 23 hedge funds' portfolios at the end of March. The all time high for this statistic is 28. Our calculations also showed that AQUA isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 26 hedge funds in our database with AQUA positions at the end of the fourth 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. Hedge funds have more than $3.5 trillion in assets under management, so you can't expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds' moves today.

Stuart Zimmer Zimmer Partners
Stuart Zimmer Zimmer Partners

Stuart Zimmer of Zimmer Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's take a peek at the key hedge fund action surrounding Evoqua Water Technologies Corp. (NYSE:AQUA).

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

At the end of the first quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. On the other hand, there were a total of 28 hedge funds with a bullish position in AQUA a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

Among these funds, Impax Asset Management held the most valuable stake in Evoqua Water Technologies Corp. (NYSE:AQUA), which was worth $115.2 million at the end of the fourth quarter. On the second spot was P2 Capital Partners which amassed $85.6 million worth of shares. Alyeska Investment Group, Zimmer Partners, and Citadel Investment Group 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 5.68% of its 13F portfolio. Jade Capital Advisors is also relatively very bullish on the stock, earmarking 3.53 percent of its 13F equity portfolio to AQUA.

Judging by the fact that Evoqua Water Technologies Corp. (NYSE:AQUA) has witnessed declining sentiment from hedge fund managers, we can see that there were a few funds that elected to cut their full holdings by the end of the first quarter. At the top of the heap, Paul Marshall and Ian Wace's Marshall Wace LLP dropped the largest position of the 750 funds monitored by Insider Monkey, comprising an estimated $17.6 million in stock. Renaissance Technologies, also dumped its stock, about $8.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds by the end of the first quarter.

Let's also examine 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 United States Cellular Corporation (NYSE:USM), Sprouts Farmers Market Inc (NASDAQ:SFM), SSR Mining Inc. (NASDAQ:SSRM), Rent-A-Center Inc (NASDAQ:RCII), Southwestern Energy Company (NYSE:SWN), Arcosa, Inc. (NYSE:ACA), and Relay Therapeutics, Inc. (NASDAQ:RLAY). All of these stocks' market caps are closest to AQUA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position USM,10,97007,-1 SFM,21,404513,-4 SSRM,16,178048,-2 RCII,26,487953,4 SWN,22,207392,1 ACA,17,220346,0 RLAY,20,636649,3 Average,18.9,318844,0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.9 hedge funds with bullish positions and the average amount invested in these stocks was $319 million. That figure was $328 million in AQUA's case. Rent-A-Center Inc (NASDAQ:RCII) is the most popular stock in this table. On the other hand United States Cellular Corporation (NYSE:USM) is the least popular one with only 10 bullish hedge fund positions. Evoqua Water Technologies Corp. (NYSE:AQUA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AQUA is 67.3. 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. 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 23.8% in 2021 through July 16th and still beat the market by 7.7 percentage points. Hedge funds were also right about betting on AQUA as the stock returned 18.7% since the end of Q1 (through 7/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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