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In this article we will analyze whether Wayfair Inc (NYSE:W) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market by double digits annually.
Wayfair Inc (NYSE:W) investors should pay attention to a decrease in hedge fund interest lately. Wayfair Inc (NYSE:W) was in 40 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 41. Our calculations also showed that W isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
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 S&P 500 ETFs by 66 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 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.
Alex Sacerdote of Whale Rock Capital Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. With all of this in mind we're going to check out the new hedge fund action regarding Wayfair Inc (NYSE:W).
Do Hedge Funds Think W Is A Good Stock To Buy Now?
At third quarter's end, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in W over the last 21 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Zachary Sternberg and Benjamin Stein's Spruce House Investment Management has the biggest position in Wayfair Inc (NYSE:W), worth close to $2.1098 billion, amounting to 11.4% of its total 13F portfolio. On Spruce House Investment Management's heels is Bares Capital Management, led by Brian Bares, holding a $749.9 million position; the fund has 15.8% of its 13F portfolio invested in the stock. Remaining peers with similar optimism include D. E. Shaw's D E Shaw, Alex Sacerdote's Whale Rock Capital Management and Wilmot B. Harkey and Daniel Mack's Nantahala Capital Management. In terms of the portfolio weights assigned to each position Bares Capital Management allocated the biggest weight to Wayfair Inc (NYSE:W), around 15.83% of its 13F portfolio. Nantahala Capital Management is also relatively very bullish on the stock, designating 11.61 percent of its 13F equity portfolio to W.
Because Wayfair Inc (NYSE:W) has experienced a decline in interest from the aggregate hedge fund industry, it's safe to say that there lies a certain "tier" of hedgies that decided to sell off their positions entirely last quarter. At the top of the heap, Steve Zheng's Deepcurrents Investment Group said goodbye to the biggest investment of the "upper crust" of funds watched by Insider Monkey, valued at close to $167.9 million in stock, and D. E. Shaw's D E Shaw was right behind this move, as the fund dumped about $55.5 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 1 funds last quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Wayfair Inc (NYSE:W) but similarly valued. These stocks are Eni SpA (NYSE:E), ING Groep N.V. (NYSE:ING), Orange SA (NYSE:ORAN), AutoZone, Inc. (NYSE:AZO), Yum! Brands, Inc. (NYSE:YUM), D.R. Horton, Inc. (NYSE:DHI), and STMicroelectronics N.V. (NYSE:STM). This group of stocks' market caps are similar to W's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position E,5,21869,-3 ING,9,279146,-4 ORAN,4,5851,1 AZO,53,2107685,-2 YUM,42,1382033,-5 DHI,62,2136859,-4 STM,21,180953,9 Average,28,873485,-1.1 [/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 $873 million. That figure was $4956 million in W's case. D.R. Horton, Inc. (NYSE:DHI) is the most popular stock in this table. On the other hand Orange SA (NYSE:ORAN) is the least popular one with only 4 bullish hedge fund positions. Wayfair Inc (NYSE:W) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for W is 64.3. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately W wasn't nearly as popular as these 20 stocks and hedge funds that were betting on W were disappointed as the stock returned -12.9% since the end of September (through 12/14) 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.
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Disclosure: None. This article was originally published at Insider Monkey.