Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first quarter. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Walker & Dunlop Inc. (NYSE:WD) to find out whether it was one of their high conviction long-term ideas.
Is Walker & Dunlop Inc. (NYSE:WD) a sound stock to buy now? Investors who are in the know are buying. The number of bullish hedge fund bets moved up by 3 recently. Our calculations also showed that WD isn't among the 30 most popular stocks among hedge funds. WD was in 14 hedge funds' portfolios at the end of March. There were 11 hedge funds in our database with WD 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 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 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.
We're going to go over the recent hedge fund action encompassing Walker & Dunlop Inc. (NYSE:WD).
What does smart money think about Walker & Dunlop Inc. (NYSE:WD)?
At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from the fourth quarter of 2018. By comparison, 10 hedge funds held shares or bullish call options in WD a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the largest position in Walker & Dunlop Inc. (NYSE:WD). Royce & Associates has a $13.7 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, led by Jim Simons, holding a $8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that hold long positions consist of Israel Englander's Millennium Management, Noam Gottesman's GLG Partners and Cliff Asness's AQR Capital Management.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, established the biggest position in Walker & Dunlop Inc. (NYSE:WD). Marshall Wace LLP had $1.6 million invested in the company at the end of the quarter. Keith M. Rosenbloom's Cruiser Capital Advisors also made a $1.3 million investment in the stock during the quarter. The other funds with brand new WD positions are Ken Griffin's Citadel Investment Group, Mike Vranos's Ellington, and Dmitry Balyasny's Balyasny Asset Management.
Let's now take a look at hedge fund activity in other stocks similar to Walker & Dunlop Inc. (NYSE:WD). These stocks are Builders FirstSource, Inc. (NASDAQ:BLDR), La-Z-Boy Incorporated (NYSE:LZB), Cars.com Inc. (NYSE:CARS), and Orchard Therapeutics plc (NASDAQ:ORTX). This group of stocks' market values are closest to WD's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BLDR,37,355773,4 LZB,21,69042,4 CARS,27,374516,9 ORTX,13,314817,1 Average,24.5,278537,4.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $279 million. That figure was $50 million in WD's case. Builders FirstSource, Inc. (NASDAQ:BLDR) is the most popular stock in this table. On the other hand Orchard Therapeutics plc (NASDAQ:ORTX) is the least popular one with only 13 bullish hedge fund positions. Walker & Dunlop Inc. (NYSE:WD) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on WD as the stock returned 7.1% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.