Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 2.5 months of this year the Standard and Poor’s 500 Index returned approximately 13.1% (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only 5% due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns (5%) versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Patrick Industries, Inc. (NASDAQ:PATK).
Is Patrick Industries, Inc. (NASDAQ:PATK) going to take off soon? Money managers are becoming more confident. The number of bullish hedge fund positions inched up by 6 lately. Our calculations also showed that PATK isn’t among the 30 most popular stocks among hedge funds.
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 32 percentage points since May 2014 through March 12, 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.
We’re going to take a look at the latest hedge fund action regarding Patrick Industries, Inc. (NASDAQ:PATK).
What does the smart money think about Patrick Industries, Inc. (NASDAQ:PATK)?
At the end of the fourth quarter, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PATK over the last 14 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, Tontine Asset Management was the largest shareholder of Patrick Industries, Inc. (NASDAQ:PATK), with a stake worth $25.6 million reported as of the end of December. Trailing Tontine Asset Management was Renaissance Technologies, which amassed a stake valued at $6.9 million. Nokomis Capital, Guardian Point Capital, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, some big names have jumped into Patrick Industries, Inc. (NASDAQ:PATK) headfirst. Nokomis Capital, managed by Brett Hendrickson, created the most outsized position in Patrick Industries, Inc. (NASDAQ:PATK). Nokomis Capital had $5.5 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $3.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Dmitry Balyasny’s Balyasny Asset Management, and John Overdeck and David Siegel’s Two Sigma Advisors.
Let’s also examine hedge fund activity in other stocks similar to Patrick Industries, Inc. (NASDAQ:PATK). We will take a look at AK Steel Holding Corporation (NYSE:AKS), Central Pacific Financial Corp. (NYSE:CPF), Fidelity Southern Corporation (NASDAQ:LION), and Cellectis SA (NASDAQ:CLLS). This group of stocks’ market valuations are similar to PATK’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AKS | 15 | 29356 | -5 |
| CPF | 14 | 65168 | 2 |
| LION | 9 | 57537 | 0 |
| CLLS | 8 | 33807 | -5 |
| Average | 11.5 | 46467 | -2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $46 million. That figure was $62 million in PATK’s case. AK Steel Holding Corporation (NYSE:AKS) is the most popular stock in this table. On the other hand Cellectis SA (NASDAQ:CLLS) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Patrick Industries, Inc. (NASDAQ:PATK) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on PATK as the stock returned 83.9% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
