Are Hedge Funds Right to be Bullish on Precision Castparts Corp. (PCP)?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The S&P 500 Index gained 5.2% in the 12 month-period that ended October 30, while less than 49% of its stocks beat the benchmark. In contrast, the 30 most popular S&P 500 stocks among the hedge fund investors tracked by the Insider Monkey team returned 9.5% over the same period, which provides evidence that these money managers do have great stock picking abilities. Even more to that, 63% of these stocks managed to beat the S&P 500 Index. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Precision Castparts Corp. (NYSE:PCP).

Is Precision Castparts Corp. (NYSE:PCP) a bargain? Prominent investors are taking a bullish view. The number of bullish hedge fund positions improved by 15 recently. 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 Tesla Motors Inc (NASDAQ:TSLA), CME Group Inc (NASDAQ:CME), and Thomson Reuters Corporation (USA) (NYSE:TRI) to gather more data points.

If you’d ask most investors, hedge funds are viewed as slow, old financial tools of the past. While there are more than 8,000 funds trading today, our experts choose to focus on the upper echelon of this group, about 700 funds. These investment experts handle the lion’s share of the hedge fund industry’s total asset base, and by paying attention to their unrivaled equity investments, Insider Monkey has spotted many investment strategies that have historically surpassed the market. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points per year for a decade in their back tests.

Now, we’re going to check out the recent action surrounding Precision Castparts Corp. (NYSE:PCP).

Hedge fund activity in Precision Castparts Corp. (NYSE:PCP)

Heading into Q4, a total of 67 of the hedge funds tracked by Insider Monkey were long this stock, a 29% jump from the previous quarter. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes meaningfully (or had already accumulated large positions).

Of the funds tracked by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the largest position in Precision Castparts Corp. (NYSE:PCP). Berkshire Hathaway has a $965 million position in the stock, comprising 0.8% of its 13F portfolio. The second-largest stake is held by Soroban Capital Partners, led by Eric W. Mandelblatt, holding an $852.2 million position; 6.2% of its 13F portfolio is allocated to the stock. Other peers that hold long positions include Matthew Halbower’s Pentwater Capital Management, the quant fund D E Shaw, and Frank Brosens’ Taconic Capital.

As industrywide interest jumped, some big names were breaking ground themselves. Pentwater Capital Management established the largest position in Precision Castparts Corp. (NYSE:PCP). Pentwater Capital Management had $763.8 million invested in the company at the end of the quarter. John Paulson’s Paulson & Co also made a $229.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Robert Emil Zoellner’s Alpine Associates, John Orrico’s Water Island Capital, and Carl Tiedemann and Michael Tiedemann’s TIG Advisors.

Let’s check out hedge fund activity in other stocks similar to Precision Castparts Corp. (NYSE:PCP). These stocks are Tesla Motors Inc (NASDAQ:TSLA), CME Group Inc (NASDAQ:CME), Thomson Reuters Corporation (USA) (NYSE:TRI), and Broadcom Corporation (NASDAQ:BRCM). This group of stocks’ market valuations match PCP’s market valuation.

As you can see these stocks had an average of 36.75 hedge funds with bullish positions and the average amount invested in these stocks was $2.24 billion. That figure was $6.45 billion in PCP’s case. Broadcom Corporation (NASDAQ:BRCM) is the most popular stock in this table. On the other hand Thomson Reuters Corporation (USA) (NYSE:TRI) is the least popular one with only 12 bullish hedge fund positions. Precision Castparts Corp. (NYSE:PCP) is not quite the most popular stock in this group (being tied with BRCM and having slightly less capital invested in it than BRCM does), but hedge fund interest is still well above average. This is a positive signal and both BRCM and PCP are good candidate to consider taking up a long position in.