Should You Buy Pearson PLC (PSO)?

In this article we will take a look at whether hedge funds think Pearson PLC (NYSE:PSO) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Pearson PLC (NYSE:PSO) the right investment to pursue these days? Money managers are becoming hopeful. The number of long hedge fund positions rose by 3 in recent months. Our calculations also showed that PSO isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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 58 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.

Donald Sussman of Paloma Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the new hedge fund action regarding Pearson PLC (NYSE:PSO).

What does smart money think about Pearson PLC (NYSE:PSO)?

At the end of the first quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 60% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in PSO over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of Pearson PLC (NYSE:PSO), with a stake worth $4.3 million reported as of the end of September. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $2.2 million. Marshall Wace LLP, Millennium Management, and D E Shaw 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 Marshall Wace LLP allocated the biggest weight to Pearson PLC (NYSE:PSO), around 0.02% of its 13F portfolio. Paloma Partners is also relatively very bullish on the stock, earmarking 0.01 percent of its 13F equity portfolio to PSO.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the biggest position in Pearson PLC (NYSE:PSO). Marshall Wace LLP had $1.8 million invested in the company at the end of the quarter. D. E. Shaw’s D E Shaw also initiated a $0.6 million position during the quarter. The other funds with brand new PSO positions are Donald Sussman’s Paloma Partners and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Pearson PLC (NYSE:PSO) but similarly valued. We will take a look at Wix.Com Ltd (NASDAQ:WIX), Lincoln National Corporation (NYSE:LNC), Lamar Advertising Company (REIT) (NASDAQ:LAMR), and ON Semiconductor Corporation (NASDAQ:ON). This group of stocks’ market caps are similar to PSO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $392 million. That figure was $11 million in PSO’s case. Lamar Advertising Company (REIT) (NASDAQ:LAMR) is the most popular stock in this table. On the other hand Lincoln National Corporation (NYSE:LNC) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Pearson PLC (NYSE:PSO) is even less popular than LNC. Hedge funds dodged a bullet by taking a bearish stance towards PSO. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.2% in 2020 through June 17th but managed to beat the market by 14.8 percentage points. Unfortunately PSO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); PSO investors were disappointed as the stock returned 6.4% during the second quarter (through June 17th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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