Hedge Funds Never Been Less Bullish On PagSeguro Digital Ltd. (PAGS)

In this article you are going to find out whether hedge funds think PagSeguro Digital Ltd. (NYSE:PAGS) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

PagSeguro Digital Ltd. (NYSE:PAGS) was in 20 hedge funds’ portfolios at the end of March. PAGS shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 21 hedge funds in our database with PAGS holdings at the end of the previous quarter. Our calculations also showed that PAGS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by 58 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.

Sahm Adrangi of Kerrisdale Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the new hedge fund action surrounding PagSeguro Digital Ltd. (NYSE:PAGS).

Hedge fund activity in PagSeguro Digital Ltd. (NYSE:PAGS)

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the fourth quarter of 2019. On the other hand, there were a total of 30 hedge funds with a bullish position in PAGS a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Sylebra Capital Management, managed by Daniel Patrick Gibson, holds the number one position in PagSeguro Digital Ltd. (NYSE:PAGS). Sylebra Capital Management has a $207.3 million position in the stock, comprising 8.5% of its 13F portfolio. Sitting at the No. 2 spot is Samlyn Capital, led by Robert Pohly, holding a $84.2 million position; the fund has 2.1% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish include Robert Pitts’s Steadfast Capital Management, Greg Poole’s Echo Street Capital Management and Beeneet Kothari’s Tekne Capital Management. In terms of the portfolio weights assigned to each position Tekne Capital Management allocated the biggest weight to PagSeguro Digital Ltd. (NYSE:PAGS), around 13.32% of its 13F portfolio. Sylebra Capital Management is also relatively very bullish on the stock, designating 8.49 percent of its 13F equity portfolio to PAGS.

Because PagSeguro Digital Ltd. (NYSE:PAGS) has experienced falling interest from the smart money, we can see that there is a sect of hedgies that decided to sell off their entire stakes heading into Q4. Interestingly, D. E. Shaw’s D E Shaw said goodbye to the biggest investment of the “upper crust” of funds tracked by Insider Monkey, worth about $41.1 million in stock, and Carl Anderson’s Marcho Partners was right behind this move, as the fund dumped about $16.7 million worth. These moves are important to note, as total hedge fund interest dropped by 1 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as PagSeguro Digital Ltd. (NYSE:PAGS) but similarly valued. We will take a look at Eastman Chemical Company (NYSE:EMN), American Financial Group (NYSE:AFG), Juniper Networks, Inc. (NYSE:JNPR), and LKQ Corporation (NASDAQ:LKQ). This group of stocks’ market valuations match PAGS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $527 million. That figure was $491 million in PAGS’s case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand American Financial Group (NYSE:AFG) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks PagSeguro Digital Ltd. (NYSE:PAGS) is even less popular than AFG. Hedge funds clearly dropped the ball on PAGS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 12.2% in 2020 through June 17th and still beat the market by 14.8 percentage points. A small number of hedge funds were also right about betting on PAGS as the stock returned 91.2% so far in the second quarter and outperformed the market by an even larger margin.

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