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 18.7% compared to 12.1%, 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.
Is PennyMac Financial Services Inc (NYSE:PFSI) undervalued? Money managers are taking an optimistic view. The number of bullish hedge fund bets improved by 6 lately. Our calculations also showed that PFSI isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to analyze the new hedge fund action regarding PennyMac Financial Services Inc (NYSE:PFSI).
How are hedge funds trading PennyMac Financial Services Inc (NYSE:PFSI)?
Heading into the second quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 60% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PFSI over the last 15 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, Omega Advisors was the largest shareholder of PennyMac Financial Services Inc (NYSE:PFSI), with a stake worth $21.7 million reported as of the end of March. Trailing Omega Advisors was Rima Senvest Management, which amassed a stake valued at $20.3 million. Long Pond Capital, PAR Capital Management, and Basswood Capital were also very fond of the stock, giving the stock large weights in their portfolios.
As one would reasonably expect, key hedge funds have jumped into PennyMac Financial Services Inc (NYSE:PFSI) headfirst. Millennium Management, managed by Israel Englander, initiated the most outsized position in PennyMac Financial Services Inc (NYSE:PFSI). Millennium Management had $6.5 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $1.9 million position during the quarter. The following funds were also among the new PFSI investors: Andrew Weiss’s Weiss Asset Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Jim Simons’s Renaissance Technologies.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as PennyMac Financial Services Inc (NYSE:PFSI) but similarly valued. We will take a look at Provident Financial Services, Inc. (NYSE:PFS), Callon Petroleum Company (NYSE:CPE), Ensco Rowan plc (NYSE:ESV), and UP Fintech Holding Limited (NASDAQ:TIGR). This group of stocks’ market valuations match PFSI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PFS | 6 | 55197 | -2 |
| CPE | 23 | 191982 | 1 |
| ESV | 21 | 248254 | -13 |
| TIGR | 9 | 13631 | 9 |
| Average | 14.75 | 127266 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $127 million. That figure was $113 million in PFSI’s case. Callon Petroleum Company (NYSE:CPE) is the most popular stock in this table. On the other hand Provident Financial Services, Inc. (NYSE:PFS) is the least popular one with only 6 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately PFSI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PFSI were disappointed as the stock returned -1.1% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.
