Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2014) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like PennyMac Financial Services Inc (NYSE:PFSI).
PennyMac Financial Services Inc (NYSE:PFSI) has experienced an increase in support from the world’s most elite money managers of late. Our calculations also showed that PFSI isn’t among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to the beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We’re going to take a peek at the key hedge fund action surrounding PennyMac Financial Services Inc (NYSE:PFSI).
How are hedge funds trading PennyMac Financial Services Inc (NYSE:PFSI)?
At Q3’s end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PFSI over the last 13 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.
More specifically, Basswood Capital was the largest shareholder of PennyMac Financial Services Inc (NYSE:PFSI), with a stake worth $47.7 million reported as of the end of September. Trailing Basswood Capital was Rima Senvest Management, which amassed a stake valued at $37.8 million. Omega Advisors, Mangrove Partners, and PAR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, key money managers were leading the bulls’ herd. Millennium Management, managed by Israel Englander, established the most outsized position in PennyMac Financial Services Inc (NYSE:PFSI). Millennium Management had $0.7 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $0.5 million position during the quarter.
Let’s check out hedge fund activity in other stocks similar to PennyMac Financial Services Inc (NYSE:PFSI). We will take a look at Arbutus Biopharma Corp (NASDAQ:ABUS), Nicolet Bankshares Inc. (NASDAQ:NCBS), J.C. Penney Company, Inc. (NYSE:JCP), and Kimball Electronics Inc (NASDAQ:KE). This group of stocks’ market values match PFSI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ABUS | 11 | 17316 | 2 |
| NCBS | 4 | 4625 | -2 |
| JCP | 20 | 42787 | -1 |
| KE | 9 | 38747 | 0 |
| Average | 11 | 26 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $26 million. That figure was $174 million in PFSI’s case. J.C. Penney Company, Inc. (NYSE:JCP) is the most popular stock in this table. On the other hand Nicolet Bankshares Inc. (NASDAQ:NCBS) is the least popular one with only 4 bullish hedge fund positions. PennyMac Financial Services Inc (NYSE:PFSI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard JCP might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
