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Were Hedge Funds Right About Souring On Wabtec Corporation (WAB)?

Reymerlyn Martin

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Wabtec Corporation (NYSE:WAB).

Wabtec Corporation (NYSE:WAB) investors should pay attention to a decrease in enthusiasm from smart money in recent months. Our calculations also showed that WAB isn't among the 30 most popular stocks among hedge funds.

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.

Bruce Kovner, Caxton Associates LP

Let's take a look at the latest hedge fund action surrounding Wabtec Corporation (NYSE:WAB).

How are hedge funds trading Wabtec Corporation (NYSE:WAB)?

At Q4's end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -44% from one quarter earlier. On the other hand, there were a total of 13 hedge funds with a bullish position in WAB a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

WAB_mar2019

The largest stake in Wabtec Corporation (NYSE:WAB) was held by Farallon Capital, which reported holding $388.6 million worth of stock at the end of September. It was followed by Park Presidio Capital with a $59.7 million position. Other investors bullish on the company included PDT Partners, Royce & Associates, and Bridgewater Associates.

Because Wabtec Corporation (NYSE:WAB) has experienced falling interest from the smart money, logic holds that there was a specific group of money managers who were dropping their entire stakes by the end of the third quarter. Intriguingly, Phill Gross and Robert Atchinson's Adage Capital Management dropped the biggest investment of the "upper crust" of funds watched by Insider Monkey, comprising an estimated $62.9 million in stock, and Principal Global Investors's Columbus Circle Investors was right behind this move, as the fund dumped about $40.4 million worth. These transactions are interesting, as total hedge fund interest was cut by 8 funds by the end of the third quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Wabtec Corporation (NYSE:WAB) but similarly valued. We will take a look at News Corp (NASDAQ:NWS), SL Green Realty Corp (NYSE:SLG), Black Knight, Inc. (NYSE:BKI), and Telecom Argentina S.A. (NYSE:TEO). This group of stocks' market caps resemble WAB's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NWS,13,72350,3 SLG,22,150197,4 BKI,36,543143,0 TEO,9,84728,0 Average,20,212605,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $213 million. That figure was $468 million in WAB's case. Black Knight, Inc. (NYSE:BKI) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 9 bullish hedge fund positions. Wabtec Corporation (NYSE:WAB) 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 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately WAB wasn't in this group. Hedge funds that bet on WAB were disappointed as the stock returned 7.5% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.

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

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