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Were Hedge Funds Right About Wabtec Corporation (WAB) ?

Abigail Fisher
·6 min read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Wabtec Corporation (NYSE:WAB) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in Wabtec Corporation (NYSE:WAB) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Enel Americas S.A. (NYSE:ENIA), NetApp Inc. (NASDAQ:NTAP), and Ubiquiti Inc. (NYSE:UI) to gather more data points. Our calculations also showed that WAB isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_30647" align="aligncenter" width="391"] Boykin Curry of Eagle Capital[/caption]

Boykin Curry EAGLE CAPITAL MANAGEMENT
Boykin Curry EAGLE CAPITAL MANAGEMENT

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to check out the key hedge fund action regarding Wabtec Corporation (NYSE:WAB).

How have hedgies been trading Wabtec Corporation (NYSE:WAB)?

At Q1's end, a total of 41 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 36 hedge funds held shares or bullish call options in WAB a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Pzena Investment Management, managed by Richard S. Pzena, holds the biggest position in Wabtec Corporation (NYSE:WAB). Pzena Investment Management has a $323.1 million position in the stock, comprising 2.4% of its 13F portfolio. Sitting at the No. 2 spot is Farallon Capital, which holds a $304.3 million position; the fund has 2.7% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions comprise Boykin Curry's Eagle Capital Management, Robert Rodriguez and Steven Romick's First Pacific Advisors LLC and Munir Javeri's 3G Sahana Capital Management. In terms of the portfolio weights assigned to each position 3G Sahana Capital Management allocated the biggest weight to Wabtec Corporation (NYSE:WAB), around 17.48% of its 13F portfolio. Park Presidio Capital is also relatively very bullish on the stock, setting aside 7.86 percent of its 13F equity portfolio to WAB.

Because Wabtec Corporation (NYSE:WAB) has faced declining sentiment from the smart money, logic holds that there exists a select few money managers that elected to cut their positions entirely last quarter. At the top of the heap, Bob Peck and Andy Raab's FPR Partners sold off the largest position of the "upper crust" of funds followed by Insider Monkey, totaling about $170.2 million in stock, and Jorge Paulo Lemann's 3G Capital was right behind this move, as the fund dumped about $95.1 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over 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 Enel Americas S.A. (NYSE:ENIA), NetApp Inc. (NASDAQ:NTAP), Ubiquiti Inc. (NYSE:UI), and Coupa Software Incorporated (NASDAQ:COUP). This group of stocks' market values resemble WAB's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENIA,7,102191,-1 NTAP,26,335752,-1 UI,23,162047,-2 COUP,66,2184206,11 Average,30.5,696049,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.5 hedge funds with bullish positions and the average amount invested in these stocks was $696 million. That figure was $1405 million in WAB's case. Coupa Software Incorporated (NASDAQ:COUP) is the most popular stock in this table. On the other hand Enel Americas S.A. (NYSE:ENIA) is the least popular one with only 7 bullish hedge fund positions. Wabtec Corporation (NYSE:WAB) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately WAB wasn't nearly as popular as these 10 stocks and hedge funds that were betting on WAB were disappointed as the stock returned 19.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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