Is Pegasystems Inc. (PEGA) Going to Burn These Hedge Funds?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Pegasystems Inc. (NASDAQ:PEGA) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Pegasystems Inc. (NASDAQ:PEGA) the right investment to pursue these days? Investors who are in the know were getting less bullish. The number of bullish hedge fund positions went down by 5 recently. Pegasystems Inc. (NASDAQ:PEGA) was in 28 hedge funds’ portfolios at the end of June. The all time high for this statistics is 33. Our calculations also showed that PEGA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 33 hedge funds in our database with PEGA positions at the end of the first quarter.

Video: 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 S&P 500 ETFs by more than 56 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. 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.

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a peek at the latest hedge fund action regarding Pegasystems Inc. (NASDAQ:PEGA).

How are hedge funds trading Pegasystems Inc. (NASDAQ:PEGA)?

At second quarter’s end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PEGA over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Bares Capital Management was the largest shareholder of Pegasystems Inc. (NASDAQ:PEGA), with a stake worth $477.2 million reported as of the end of September. Trailing Bares Capital Management was Luxor Capital Group, which amassed a stake valued at $294.3 million. Cadian Capital, Foxhaven Asset Management, and Fisher Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Bares Capital Management allocated the biggest weight to Pegasystems Inc. (NASDAQ:PEGA), around 11.78% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, earmarking 9.99 percent of its 13F equity portfolio to PEGA.

Because Pegasystems Inc. (NASDAQ:PEGA) has experienced declining sentiment from the smart money, it’s easy to see that there lies a certain “tier” of hedgies that slashed their positions entirely last quarter. Intriguingly, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners cut the biggest stake of the “upper crust” of funds watched by Insider Monkey, totaling close to $4.3 million in stock, and  Highbridge Capital Management was right behind this move, as the fund cut about $4.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 5 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Pegasystems Inc. (NASDAQ:PEGA) but similarly valued. We will take a look at American Homes 4 Rent (NYSE:AMH), 58.com Inc (NYSE:WUBA), Whirlpool Corporation (NYSE:WHR), Wynn Resorts, Limited (NASDAQ:WYNN), Guardant Health, Inc. (NASDAQ:GH), Graco Inc. (NYSE:GGG), and LKQ Corporation (NASDAQ:LKQ). This group of stocks’ market valuations match PEGA’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.3 hedge funds with bullish positions and the average amount invested in these stocks was $762 million. That figure was $1451 million in PEGA’s case. Wynn Resorts, Limited (NASDAQ:WYNN) is the most popular stock in this table. On the other hand American Homes 4 Rent (NYSE:AMH) is the least popular one with only 23 bullish hedge fund positions. Pegasystems Inc. (NASDAQ:PEGA) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PEGA is 36.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. A small number of hedge funds were also right about betting on PEGA as the stock returned 17.5% since the end of June (through September 25th) and outperformed the market by an even larger margin.

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