Was The Smart Money Right About Selling Parsley Energy Inc (PE)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Parsley Energy Inc (NYSE:PE).

Is Parsley Energy Inc (NYSE:PE) a good stock to buy now? The smart money was in a bearish mood. The number of bullish hedge fund bets went down by 6 lately. Parsley Energy Inc (NYSE:PE) was in 39 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 52. Our calculations also showed that PE 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 45 hedge funds in our database with PE 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.

Phillip Gross of Adage Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. 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 analyze the fresh hedge fund action regarding Parsley Energy Inc (NYSE:PE).

What have hedge funds been doing with Parsley Energy Inc (NYSE:PE)?

Heading into the third quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the first quarter of 2020. By comparison, 36 hedge funds held shares or bullish call options in PE a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

The largest stake in Parsley Energy Inc (NYSE:PE) was held by Citadel Investment Group, which reported holding $65.6 million worth of stock at the end of June. It was followed by Millennium Management with a $48.1 million position. Other investors bullish on the company included Adage Capital Management, Encompass Capital Advisors, and SIR Capital Management. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Parsley Energy Inc (NYSE:PE), around 8.47% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, setting aside 5.86 percent of its 13F equity portfolio to PE.

Seeing as Parsley Energy Inc (NYSE:PE) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of hedgies who sold off their full holdings in the second quarter. It’s worth mentioning that Jonathan Barrett and Paul Segal’s Luminus Management sold off the biggest investment of the 750 funds tracked by Insider Monkey, totaling an estimated $15.2 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $7.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 6 funds in the second quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Parsley Energy Inc (NYSE:PE) but similarly valued. We will take a look at Arrowhead Pharmaceuticals Inc. (NASDAQ:ARWR), The Middleby Corporation (NASDAQ:MIDD), NewMarket Corporation (NYSE:NEU), Silicon Laboratories (NASDAQ:SLAB), Sinopec Shanghai Petrochemical Co. (NYSE:SHI), Mercury Systems Inc (NASDAQ:MRCY), and Schneider National, Inc. (NYSE:SNDR). This group of stocks’ market values match PE’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.3 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $508 million in PE’s case. Silicon Laboratories (NASDAQ:SLAB) is the most popular stock in this table. On the other hand Sinopec Shanghai Petrochemical Co. (NYSE:SHI) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Parsley Energy Inc (NYSE:PE) is more popular among hedge funds. Our overall hedge fund sentiment score for PE is 71.5. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately PE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PE were disappointed as the stock returned -5.8% since the end of the second quarter (through 10/30) 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 in 2020.

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