Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the 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 fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the fourth quarter still sport strong fundamentals and their decline was 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 California Water Service Group (NYSE:CWT) changed recently.
Is California Water Service Group (NYSE:CWT) the right investment to pursue these days? Hedge funds are becoming hopeful. The number of bullish hedge fund positions improved by 5 lately. Our calculations also showed that CWT isn't among the 30 most popular stocks among hedge funds. CWT was in 8 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 3 hedge funds in our database with CWT holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 32 percentage points since May 2014 through March 12, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let's take a look at the new hedge fund action surrounding California Water Service Group (NYSE:CWT).
What does the smart money think about California Water Service Group (NYSE:CWT)?
Heading into the first quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 167% from the previous quarter. By comparison, 10 hedge funds held shares or bullish call options in CWT a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Winton Capital Management was the largest shareholder of California Water Service Group (NYSE:CWT), with a stake worth $15.4 million reported as of the end of September. Trailing Winton Capital Management was Millennium Management, which amassed a stake valued at $5 million. PEAK6 Capital Management, Two Sigma Advisors, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.
Now, key hedge funds have been driving this bullishness. Millennium Management, managed by Israel Englander, created the most outsized position in California Water Service Group (NYSE:CWT). Millennium Management had $5 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also initiated a $2.6 million position during the quarter. The other funds with new positions in the stock are Jim Simons's Renaissance Technologies, Cliff Asness's AQR Capital Management, and Andrew Weiss's Weiss Asset Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as California Water Service Group (NYSE:CWT) but similarly valued. We will take a look at Corporate Office Properties Trust (NYSE:OFC), Mercury Systems Inc (NASDAQ:MRCY), The Dolan Company (NYSE:DM), and Domtar Corporation (NYSE:UFS). This group of stocks' market caps are similar to CWT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OFC,23,137135,13 MRCY,6,19557,-5 DM,5,13327,1 UFS,25,102549,3 Average,14.75,68142,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $26 million in CWT's case. Domtar Corporation (NYSE:UFS) is the most popular stock in this table. On the other hand The Dolan Company (NYSE:DM) is the least popular one with only 5 bullish hedge fund positions. California Water Service Group (NYSE:CWT) is not the least popular stock in this group but hedge fund interest is still below average. 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately CWT wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); CWT investors were disappointed as the stock returned 4.2% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.