Was The Smart Money Right About Pinduoduo Inc. (PDD)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Melvin Capital’s recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Pinduoduo Inc. (NASDAQ:PDD).

Is Pinduoduo Inc. (NASDAQ:PDD) going to take off soon? The best stock pickers were cutting their exposure. The number of long hedge fund positions were cut by 7 lately. Pinduoduo Inc. (NASDAQ:PDD) was in 49 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 56. Our calculations also showed that PDD isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 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.

James Dinan of York Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, billionaire John Paulson is loading up on the miners, so we are checking out stock pitches like this mining stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let’s analyze the latest hedge fund action surrounding Pinduoduo Inc. (NASDAQ:PDD).

Do Hedge Funds Think PDD Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards PDD over the last 24 quarters. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Tiger Global Management LLC, managed by Chase Coleman, holds the biggest position in Pinduoduo Inc. (NASDAQ:PDD). Tiger Global Management LLC has a $1.785 billion position in the stock, comprising 3.3% of its 13F portfolio. The second most bullish fund manager is Hillhouse Capital Management, led by Lei Zhang, holding a $876.7 million position; 9% of its 13F portfolio is allocated to the stock. Other peers that hold long positions include Ken Fisher’s Fisher Asset Management, Christopher Lyle’s SCGE Management and Larry Chen and Terry Zhang’s Tairen Capital. In terms of the portfolio weights assigned to each position Tairen Capital allocated the biggest weight to Pinduoduo Inc. (NASDAQ:PDD), around 42.85% of its 13F portfolio. Panview Capital is also relatively very bullish on the stock, earmarking 18.45 percent of its 13F equity portfolio to PDD.

Judging by the fact that Pinduoduo Inc. (NASDAQ:PDD) has witnessed declining sentiment from the smart money, it’s easy to see that there exists a select few fund managers who sold off their entire stakes heading into Q3. It’s worth mentioning that Alex Sacerdote’s Whale Rock Capital Management sold off the biggest stake of all the hedgies tracked by Insider Monkey, comprising an estimated $93.8 million in stock. David Costen Haley’s fund, HBK Investments, also dumped its stock, about $63 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 7 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to Pinduoduo Inc. (NASDAQ:PDD). We will take a look at AstraZeneca plc (NASDAQ:AZN), Philip Morris International Inc. (NYSE:PM), Royal Dutch Shell plc (NYSE:RDS), Unilever PLC (NYSE:UL), Honeywell International Inc. (NASDAQ:HON), Linde plc (NYSE:LIN), and Bristol Myers Squibb Company (NYSE:BMY). All of these stocks’ market caps are similar to PDD’s market cap.

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As you can see these stocks had an average of 46.4 hedge funds with bullish positions and the average amount invested in these stocks was $3570 million. That figure was $5277 million in PDD’s case. Bristol Myers Squibb Company (NYSE:BMY) is the most popular stock in this table. On the other hand Unilever PLC (NYSE:UL) is the least popular one with only 19 bullish hedge fund positions. Pinduoduo Inc. (NASDAQ:PDD) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PDD is 52. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately PDD wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on PDD were disappointed as the stock returned -34.1% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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