Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 24.4% compared to 20.4%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.
PennyMac Financial Services Inc (NYSE:PFSI) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 16 hedge funds’ portfolios at the end of June. 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 Kronos Worldwide, Inc. (NYSE:KRO), Plexus Corp. (NASDAQ:PLXS), and Kaman Corporation (NYSE:KAMN) to gather more data points. Our calculations also showed that PFSI isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s review the fresh hedge fund action surrounding PennyMac Financial Services Inc (NYSE:PFSI).
How have hedgies been trading PennyMac Financial Services Inc (NYSE:PFSI)?
Heading into the third quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in PFSI 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.
The largest stake in PennyMac Financial Services Inc (NYSE:PFSI) was held by PAR Capital Management, which reported holding $21.1 million worth of stock at the end of March. It was followed by Rima Senvest Management with a $20 million position. Other investors bullish on the company included Basswood Capital, Long Pond Capital, and Millennium Management.
Since PennyMac Financial Services Inc (NYSE:PFSI) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of hedgies who sold off their entire stakes heading into Q3. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the biggest investment of the 750 funds monitored by Insider Monkey, totaling about $1.7 million in stock. Andrew Feldstein and Stephen Siderow’s fund, Blue Mountain Capital, also sold off its stock, about $0.2 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks similar to PennyMac Financial Services Inc (NYSE:PFSI). These stocks are Kronos Worldwide, Inc. (NYSE:KRO), Plexus Corp. (NASDAQ:PLXS), Kaman Corporation (NYSE:KAMN), and WillScot Corporation (NASDAQ:WSC). This group of stocks’ market caps are closest to PFSI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| KRO | 12 | 31123 | -1 |
| PLXS | 8 | 50959 | -1 |
| KAMN | 14 | 237265 | 2 |
| WSC | 23 | 186226 | 1 |
| Average | 14.25 | 126393 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $126 million. That figure was $105 million in PFSI’s case. WillScot Corporation (NASDAQ:WSC) is the most popular stock in this table. On the other hand Plexus Corp. (NASDAQ:PLXS) is the least popular one with only 8 bullish hedge fund positions. PennyMac Financial Services Inc (NYSE:PFSI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on PFSI as the stock returned 37% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
