Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Pacific Mercantile Bancorp (NASDAQ:PMBC).
Pacific Mercantile Bancorp (NASDAQ:PMBC) was in 4 hedge funds’ portfolios at the end of September. PMBC shareholders have witnessed an increase in support from the world’s most elite money managers recently. There were 3 hedge funds in our database with PMBC positions at the end of the previous quarter. Our calculations also showed that PMBC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a look at the new hedge fund action regarding Pacific Mercantile Bancorp (NASDAQ:PMBC).
Hedge fund activity in Pacific Mercantile Bancorp (NASDAQ:PMBC)
At Q3’s end, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from the second quarter of 2019. By comparison, 3 hedge funds held shares or bullish call options in PMBC a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, EJF Capital, managed by Emanuel J. Friedman, holds the biggest position in Pacific Mercantile Bancorp (NASDAQ:PMBC). EJF Capital has a $12 million position in the stock, comprising 1.6% of its 13F portfolio. The second most bullish fund manager is Renaissance Technologies holding a $5.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism include Fred Cummings’s Elizabeth Park Capital Management, Israel Englander’s Millennium Management and . In terms of the portfolio weights assigned to each position EJF Capital allocated the biggest weight to Pacific Mercantile Bancorp (NASDAQ:PMBC), around 1.64% of its 13F portfolio. Elizabeth Park Capital Management is also relatively very bullish on the stock, earmarking 1.47 percent of its 13F equity portfolio to PMBC.
Now, specific money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, established the most outsized position in Pacific Mercantile Bancorp (NASDAQ:PMBC). Millennium Management had $0.2 million invested in the company at the end of the quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Pacific Mercantile Bancorp (NASDAQ:PMBC) but similarly valued. We will take a look at Saga Communications, Inc. (NASDAQ:SGA), Uranium Energy Corp. (NYSE:UEC), Exela Technologies, Inc. (NASDAQ:XELA), and Safe Bulkers, Inc. (NYSE:SB). This group of stocks’ market caps resemble PMBC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SGA | 4 | 18666 | 1 |
| UEC | 6 | 2957 | -5 |
| XELA | 7 | 32646 | -2 |
| SB | 7 | 10705 | 2 |
| Average | 6 | 16244 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 6 hedge funds with bullish positions and the average amount invested in these stocks was $16 million. That figure was $22 million in PMBC’s case. Exela Technologies, Inc. (NASDAQ:XELA) is the most popular stock in this table. On the other hand Saga Communications, Inc. (NASDAQ:SGA) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Pacific Mercantile Bancorp (NASDAQ:PMBC) is even less popular than SGA. Hedge funds dodged a bullet by taking a bearish stance towards PMBC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately PMBC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PMBC investors were disappointed as the stock returned -4.7% during the fourth quarter (through the end of November) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
