Should You Avoid PDF Solutions, Inc. (PDFS)?

Legendary investors such as Leon Cooperman and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those successful funds in these small-cap stocks. In the following paragraphs, we analyze PDF Solutions, Inc. (NASDAQ:PDFS) from the perspective of those successful funds.

Is PDF Solutions, Inc. (NASDAQ:PDFS) a sound investment right now? It looks like managers are actually taking a pessimistic view. The number of long hedge fund bets that are revealed through the 13F filings dropped by five last quarter. In this way, there were 12 hedge funds in our database with PDFS positions at the end of September. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as SP Plus Corp (NASDAQ:SP), K12 Inc. (NYSE:LRN), and Kforce Inc. (NASDAQ:KFRC) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Now, we’re going to check out the latest action regarding PDF Solutions, Inc. (NASDAQ:PDFS).

What does the smart money think about PDF Solutions, Inc. (NASDAQ:PDFS)?

At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, down by 29% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in PDFS at the beginning of this year. So, let’s find out 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, Amy Minella’s Cardinal Capital has the biggest position in PDF Solutions, Inc. (NASDAQ:PDFS), worth close to $46.6 million, comprising 2.2% of its total 13F portfolio. Coming in second is Brian C. Freckmann’s Lyon Street Capital, with a $21.6 million position; 10.5% of its 13F portfolio is allocated to the stock. Other peers with similar optimism contain Renaissance Technologies, one of the largest hedge funds in the world, Chuck Royce’s Royce & Associates, and David Brown’s Hawk Ridge Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Since PDF Solutions, Inc. (NASDAQ:PDFS) has sustained declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few money managers who were dropping their entire stakes in the third quarter. It’s worth mentioning that Spencer M. Waxman’s Shannon River Fund Management cashed in the biggest investment of the “upper crust” of funds tracked by Insider Monkey, valued at close to $7.1 million in stock. Robert B. Gillam’s fund, McKinley Capital Management, also dumped its stock, about $2.4 million worth.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as PDF Solutions, Inc. (NASDAQ:PDFS) but similarly valued. We will take a look at SP Plus Corp (NASDAQ:SP), K12 Inc. (NYSE:LRN), Kforce Inc. (NASDAQ:KFRC), and Kadant Inc. (NYSE:KAI). This group of stocks’ market caps are closest to PDFS’s market cap.

As you can see these stocks had an average of 12 investors with bullish positions and the average amount invested in these stocks was $45 million. That figure was $89 million in PDFS’s case. K12 Inc. (NYSE:LRN) is the most popular stock in this table, while Kforce Inc. (NASDAQ:KFRC) is the least popular one with only eight bullish hedge fund positions. PDF Solutions, Inc. (NASDAQ:PDFS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard LRN might be a better candidate to consider taking a long position in.

Disclosure: none