Were Hedge Funds Right About Crowding Into Wayfair Inc (W)?

Asma UL Husna
·6 min read

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Wayfair Inc (NYSE:W)? The smart money sentiment can provide an answer to this question.

Wayfair Inc (NYSE:W) shareholders have witnessed an increase in hedge fund interest in recent months. Wayfair Inc (NYSE:W) was in 41 hedge funds' portfolios at the end of June. The all time high for this statistics is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 34 hedge funds in our database with W holdings at the end of March. Our calculations also showed that W 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.

To the average investor there are a lot of formulas stock traders have at their disposal to evaluate stocks. A pair of the best formulas are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the best picks of the top hedge fund managers can outpace the broader indices by a solid amount (see the details here).

Ryan Tolkin, CIO of Schonfeld Strategic Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. With all of this in mind let's go over the latest hedge fund action surrounding Wayfair Inc (NYSE:W).

How have hedgies been trading Wayfair Inc (NYSE:W)?

At second quarter's end, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of 21% from the first quarter of 2020. On the other hand, there were a total of 32 hedge funds with a bullish position in W a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Zachary Sternberg and Benjamin Stein's Spruce House Investment Management has the largest position in Wayfair Inc (NYSE:W), worth close to $1.4327 billion, amounting to 19.2% of its total 13F portfolio. Sitting at the No. 2 spot is Bares Capital Management, managed by Brian Bares, which holds a $590.9 million position; 14.6% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions 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 Spruce House Investment Management allocated the biggest weight to Wayfair Inc (NYSE:W), around 19.21% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, dishing out 14.58 percent of its 13F equity portfolio to W.

As industrywide interest jumped, some big names were leading the bulls' herd. Adage Capital Management, managed by Phill Gross and Robert Atchinson, established the most outsized position in Wayfair Inc (NYSE:W). Adage Capital Management had $189.7 million invested in the company at the end of the quarter. John Overdeck and David Siegel's Two Sigma Advisors also made a $109.5 million investment in the stock during the quarter. The other funds with brand new W positions are Jonathan Auerbach's Hound Partners, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, and Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Wayfair Inc (NYSE:W) but similarly valued. These stocks are Garmin Ltd. (NASDAQ:GRMN), Coupa Software Incorporated (NASDAQ:COUP), The Royal Bank of Scotland Group plc (NYSE:RBS), Arthur J. Gallagher & Co. (NYSE:AJG), Ameriprise Financial, Inc. (NYSE:AMP), MPLX LP (NYSE:MPLX), and Nutrien Ltd. (NYSE:NTR). All of these stocks' market caps are closest to W's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GRMN,23,398083,-4 COUP,50,3002984,-16 RBS,5,5012,0 AJG,29,234663,1 AMP,28,707002,2 MPLX,13,179753,2 NTR,22,490722,0 Average,24.3,716888,-2.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.3 hedge funds with bullish positions and the average amount invested in these stocks was $717 million. That figure was $3534 million in W's case. Coupa Software Incorporated (NASDAQ:COUP) is the most popular stock in this table. On the other hand The Royal Bank of Scotland Group plc (NYSE:RBS) is the least popular one with only 5 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 80. 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. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on W as the stock returned 34.5% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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