Hedge Funds Are Coming Back To Patterson Companies, Inc. (PDCO)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Patterson Companies, Inc. (NASDAQ:PDCO) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Patterson Companies, Inc. (NASDAQ:PDCO) a cheap investment today? Money managers were getting more bullish. The number of long hedge fund positions inched up by 5 in recent months. Patterson Companies, Inc. (NASDAQ:PDCO) was in 22 hedge funds’ portfolios at the end of June. The all time high for this statistics is 29. Our calculations also showed that PDCO 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). There were 17 hedge funds in our database with PDCO holdings at the end of March.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Jeffrey Bronchick of Cove Street Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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 take a look at the fresh hedge fund action encompassing Patterson Companies, Inc. (NASDAQ:PDCO).

How have hedgies been trading Patterson Companies, Inc. (NASDAQ:PDCO)?

Heading into the third quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in PDCO a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, GAMCO Investors was the largest shareholder of Patterson Companies, Inc. (NASDAQ:PDCO), with a stake worth $29.6 million reported as of the end of September. Trailing GAMCO Investors was Renaissance Technologies, which amassed a stake valued at $16.6 million. Arrowstreet Capital, AQR Capital Management, and Cove Street Capital 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 Tavio Capital allocated the biggest weight to Patterson Companies, Inc. (NASDAQ:PDCO), around 5.92% of its 13F portfolio. Cove Street Capital is also relatively very bullish on the stock, dishing out 2.41 percent of its 13F equity portfolio to PDCO.

As industrywide interest jumped, key money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Patterson Companies, Inc. (NASDAQ:PDCO). Arrowstreet Capital had $16.5 million invested in the company at the end of the quarter. Chuck Royce’s Royce & Associates also made a $9.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Thyra Zerhusen’s Fairpointe Capital, Amy Mulderry’s Tavio Capital, and Lee Ainslie’s Maverick Capital.

Let’s now take a look at hedge fund activity in other stocks similar to Patterson Companies, Inc. (NASDAQ:PDCO). These stocks are Associated Banc Corp (NYSE:ASB), Cronos Group Inc. (NASDAQ:CRON), Helmerich & Payne, Inc. (NYSE:HP), Piedmont Office Realty Trust, Inc. (NYSE:PDM), Laureate Education, Inc. (NASDAQ:LAUR), Cathay General Bancorp (NASDAQ:CATY), and Cabot Corporation (NYSE:CBT). This group of stocks’ market valuations are closest to PDCO’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $100 million. That figure was $126 million in PDCO’s case. Helmerich & Payne, Inc. (NYSE:HP) is the most popular stock in this table. On the other hand Piedmont Office Realty Trust, Inc. (NYSE:PDM) is the least popular one with only 11 bullish hedge fund positions. Patterson Companies, Inc. (NASDAQ:PDCO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PDCO is 57.8. 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 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on PDCO, though not to the same extent, as the stock returned 10.8% in Q3 and outperformed the market as well.

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