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Were Hedge Funds Right About The Western Union Company (WU)?

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Reymerlyn Martin
·7 min read
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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards The Western Union Company (NYSE:WU).

The Western Union Company (NYSE:WU) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 34 hedge funds' portfolios at the end of the second quarter of 2020. Our calculations also showed that WU isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). 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 Camden Property Trust (NYSE:CPT), ICON Public Limited Company (NASDAQ:ICLR), and Fortune Brands Home & Security Inc (NYSE:FBHS) to gather more data points. Our calculations also showed that WU isn't among the 30 most popular stocks among hedge funds (click for Q2 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jacob Rothschild - RIT Capital
Jacob Rothschild - RIT Capital

Jacob Rothschild of RIT Capital Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we're going to take a look at the fresh hedge fund action encompassing The Western Union Company (NYSE:WU).

What does smart money think about The Western Union Company (NYSE:WU)?

At the end of the second quarter, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in WU a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in The Western Union Company (NYSE:WU), which was worth $192.1 million at the end of the third quarter. On the second spot was International Value Advisers which amassed $102.9 million worth of shares. D E Shaw, Arrowstreet Capital, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position International Value Advisers allocated the biggest weight to The Western Union Company (NYSE:WU), around 7.63% of its 13F portfolio. RIT Capital Partners is also relatively very bullish on the stock, dishing out 2.25 percent of its 13F equity portfolio to WU.

Seeing as The Western Union Company (NYSE:WU) has faced a decline in interest from the smart money, it's safe to say that there exists a select few funds that elected to cut their positions entirely heading into Q3. It's worth mentioning that Bernard Horn's Polaris Capital Management said goodbye to the biggest stake of the "upper crust" of funds watched by Insider Monkey, worth about $32.2 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also dropped its stock, about $10.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as The Western Union Company (NYSE:WU) but similarly valued. These stocks are Camden Property Trust (NYSE:CPT), ICON Public Limited Company (NASDAQ:ICLR), Fortune Brands Home & Security Inc (NYSE:FBHS), NIO Limited (NYSE:NIO), Dr. Reddy's Laboratories Limited (NYSE:RDY), 10x Genomics, Inc. (NASDAQ:TXG), and Crown Holdings, Inc. (NYSE:CCK). This group of stocks' market valuations resemble WU's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CPT,26,336306,-6 ICLR,24,590357,3 FBHS,34,395135,3 NIO,30,567819,14 RDY,12,173335,1 TXG,19,313211,-1 CCK,51,1239713,-5 Average,28,516554,1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $517 million. That figure was $623 million in WU's case. Crown Holdings, Inc. (NYSE:CCK) is the most popular stock in this table. On the other hand Dr. Reddy's Laboratories Limited (NYSE:RDY) is the least popular one with only 12 bullish hedge fund positions. The Western Union Company (NYSE:WU) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for WU is 63.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately WU wasn't nearly as popular as these 10 stocks and hedge funds that were betting on WU were disappointed as the stock returned -9.2% since the end of June (through 10/30) 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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