Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged during the first quarter. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 40% and 25% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the first 5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is PulteGroup, Inc. (NYSE:PHM) a buy right now? Prominent investors are in an optimistic mood. The number of long hedge fund bets went up by 1 in recent months. Our calculations also showed that phm isn’t among the 30 most popular stocks among hedge funds. PHM was in 25 hedge funds’ portfolios at the end of March. There were 24 hedge funds in our database with PHM positions at the end of the previous quarter.
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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Cliff Asness of AQR Capital Management
We’re going to take a look at the fresh hedge fund action encompassing PulteGroup, Inc. (NYSE:PHM).
How are hedge funds trading PulteGroup, Inc. (NYSE:PHM)?
Heading into the second quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in PHM over the last 15 quarters. 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 PulteGroup, Inc. (NYSE:PHM) was held by AQR Capital Management, which reported holding $207.3 million worth of stock at the end of March. It was followed by Greenhaven Associates with a $191.2 million position. Other investors bullish on the company included Arrowstreet Capital, Renaissance Technologies, and Millennium Management.
With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the largest position in PulteGroup, Inc. (NYSE:PHM). Arrowstreet Capital had $103.1 million invested in the company at the end of the quarter. Robert Pohly’s Samlyn Capital also made a $11.4 million investment in the stock during the quarter. The other funds with brand new PHM positions are John Brandmeyer’s Cognios Capital, Jeffrey Talpins’s Element Capital Management, and Anand Parekh’s Alyeska Investment Group.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as PulteGroup, Inc. (NYSE:PHM) but similarly valued. We will take a look at Hyatt Hotels Corporation (NYSE:H), Kilroy Realty Corp (NYSE:KRC), Pentair plc (NYSE:PNR), and RPM International Inc. (NYSE:RPM). This group of stocks’ market values are similar to PHM’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| H | 24 | 761564 | -1 |
| KRC | 11 | 140109 | -2 |
| PNR | 28 | 675196 | 3 |
| RPM | 21 | 384411 | -2 |
| Average | 21 | 490320 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $490 million. That figure was $740 million in PHM’s case. Pentair plc (NYSE:PNR) is the most popular stock in this table. On the other hand Kilroy Realty Corp (NYSE:KRC) is the least popular one with only 11 bullish hedge fund positions. PulteGroup, Inc. (NYSE:PHM) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on PHM as the stock returned 12.8% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
