Do Hedge Funds Love Preferred Bank (PFBC)?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards Preferred Bank (NASDAQ:PFBC), and what that likely means for the prospects of the company and its stock.

Hedge fund interest in Preferred Bank (NASDAQ:PFBC) shares was flat at the end of last quarter, with 9 hedge funds bullish on the company. This is usually a negative indicator. At the end of this article we will also compare PFBC to other stocks including Minerva Neurosciences Inc (NASDAQ:NERV), Trupanion Inc (NYSE:TRUP), and Camden National Corporation (NASDAQ:CAC) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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What have hedge funds been doing with Preferred Bank (NASDAQ:PFBC)?

At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, unchanged from the second quarter of 2016. On the other hand, there were a total of 7 hedge funds with a bullish position in PFBC at the beginning of this year. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Basswood Capital, led by Matthew Lindenbaum, holds the biggest position in Preferred Bank (NASDAQ:PFBC). Basswood Capital has a $20.5 million position in the stock, comprising 1% of its 13F portfolio. Coming in second is Renaissance Technologies, one of the biggest hedge funds in the world, with a $12.1 million position. Other hedge funds and institutional investors that hold long positions contain Fred Cummings’ Elizabeth Park Capital Management, Israel Englander’s Millennium Management and Cliff Asness’ AQR Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: McKinley Capital Management. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Arrowstreet Capital).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Preferred Bank (NASDAQ:PFBC) but similarly valued. We will take a look at Minerva Neurosciences Inc (NASDAQ:NERV), Trupanion Inc (NYSE:TRUP), Camden National Corporation (NASDAQ:CAC), and ArcBest Corp (NASDAQ:ARCB). This group of stocks’ market caps are closest to PFBC’s market cap.

As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $50 million in PFBC’s case. ArcBest Corp (NASDAQ:ARCB) is the most popular stock in this table. On the other hand Camden National Corporation (NASDAQ:CAC) is the least popular one with only 6 bullish hedge fund positions. Preferred Bank (NASDAQ:PFBC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ARCB might be a better candidate to consider taking a long position in.

Disclosure: None