Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Webster Financial Corporation (NYSE:WBS) and see how the stock is affected by the recent hedge fund activity.
Is Webster Financial Corporation (NYSE:WBS) a buy right now? Investors who are in the know are becoming less hopeful. The number of bullish hedge fund bets shrunk by 3 in recent months. Our calculations also showed that WBS isn't among the 30 most popular stocks among hedge funds (view the video below). WBS was in 22 hedge funds' portfolios at the end of the second quarter of 2019. There were 25 hedge funds in our database with WBS holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
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. We're going to take a gander at the recent hedge fund action encompassing Webster Financial Corporation (NYSE:WBS).
How are hedge funds trading Webster Financial Corporation (NYSE:WBS)?
Heading into the third quarter of 2019, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in WBS a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
The largest stake in Webster Financial Corporation (NYSE:WBS) was held by Nitorum Capital, which reported holding $79.9 million worth of stock at the end of March. It was followed by Pzena Investment Management with a $58.6 million position. Other investors bullish on the company included Polaris Capital Management, Royce & Associates, and Fisher Asset Management.
Due to the fact that Webster Financial Corporation (NYSE:WBS) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there were a few hedgies that slashed their full holdings heading into Q3. It's worth mentioning that Mariko Gordon's Daruma Asset Management dropped the biggest investment of all the hedgies followed by Insider Monkey, valued at close to $2.6 million in stock, and Phil Frohlich's Prescott Group Capital Management was right behind this move, as the fund dumped about $1.4 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 3 funds heading into Q3.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Webster Financial Corporation (NYSE:WBS) but similarly valued. We will take a look at DCP Midstream LP (NYSE:DCP), Carter's, Inc. (NYSE:CRI), SLM Corp (NASDAQ:SLM), and Wyndham Destinations, Inc. (NYSE:WYND). This group of stocks' market valuations resemble WBS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DCP,2,13029,0 CRI,25,192467,6 SLM,32,607447,3 WYND,22,456955,-3 Average,20.25,317475,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $317 million. That figure was $365 million in WBS's case. SLM Corp (NASDAQ:SLM) is the most popular stock in this table. On the other hand DCP Midstream LP (NYSE:DCP) is the least popular one with only 2 bullish hedge fund positions. Webster Financial Corporation (NYSE:WBS) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately WBS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on WBS were disappointed as the stock returned -1.1% during the third quarter 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.
Disclosure: None. This article was originally published at Insider Monkey.