Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: PRA Group, Inc. (NASDAQ:PRAA).
PRA Group, Inc. (NASDAQ:PRAA) was in 8 hedge funds’ portfolios at the end of the second quarter of 2019. PRAA shareholders have witnessed a decrease in hedge fund sentiment lately. There were 11 hedge funds in our database with PRAA positions at the end of the previous quarter. Our calculations also showed that PRAA isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a look at the fresh hedge fund action encompassing PRA Group, Inc. (NASDAQ:PRAA).
How have hedgies been trading PRA Group, Inc. (NASDAQ:PRAA)?
Heading into the third quarter of 2019, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from one quarter earlier. By comparison, 10 hedge funds held shares or bullish call options in PRAA a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Gilchrist Berg’s Water Street Capital has the number one position in PRA Group, Inc. (NASDAQ:PRAA), worth close to $15 million, amounting to 1% of its total 13F portfolio. The second most bullish fund manager is HBK Investments, managed by David Costen Haley, which holds a $4.2 million call position; 0.1% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions consist of Renaissance Technologies, Ken Griffin’s Citadel Investment Group and D. E. Shaw’s D E Shaw.
Because PRA Group, Inc.(NASDAQ:PRAA) has experienced a decline in interest from hedge fund managers, logic holds that there was a specific group of fund managers that elected to cut their entire stakes heading into Q3. It’s worth mentioning that Howard Marks’s Oaktree Capital Management dropped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, totaling close to $9.9 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dumped about $6.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 3 funds heading into Q3.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as PRA Group, Inc. (NASDAQ:PRAA) but similarly valued. These stocks are ArQule, Inc. (NASDAQ:ARQL), IMAX Corporation (NYSE:IMAX), Denny’s Corporation (NASDAQ:DENN), and Victory Capital Holdings, Inc. (NASDAQ:VCTR). All of these stocks’ market caps are similar to PRAA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ARQL | 25 | 356860 | 10 |
| IMAX | 12 | 44044 | -3 |
| DENN | 17 | 196803 | -2 |
| VCTR | 12 | 68237 | -1 |
| Average | 16.5 | 166486 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $166 million. That figure was $27 million in PRAA’s case. ArQule, Inc. (NASDAQ:ARQL) is the most popular stock in this table. On the other hand IMAX Corporation (NYSE:IMAX) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks PRA Group, Inc. (NASDAQ:PRAA) is even less popular than IMAX. Hedge funds clearly dropped the ball on PRAA as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on PRAA as the stock returned 20.1% during the third quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
