Were Hedge Funds Right About Dumping Powell Industries, Inc. (POWL)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Powell Industries, Inc. (NASDAQ:POWL) based on that data and determine whether they were really smart about the stock.

Powell Industries, Inc. (NASDAQ:POWL) was in 13 hedge funds’ portfolios at the end of March. POWL shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. There were 18 hedge funds in our database with POWL positions at the end of the previous quarter. Our calculations also showed that POWL 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 scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. 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 we’re going to analyze the fresh hedge fund action regarding Powell Industries, Inc. (NASDAQ:POWL).

How are hedge funds trading Powell Industries, Inc. (NASDAQ:POWL)?

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -28% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards POWL over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Renaissance Technologies, holds the biggest position in Powell Industries, Inc. (NASDAQ:POWL). Renaissance Technologies has a $16.2 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $3.4 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money that are bullish include Chuck Royce’s Royce & Associates, Israel Englander’s Millennium Management and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Beddow Capital Management allocated the biggest weight to Powell Industries, Inc. (NASDAQ:POWL), around 0.2% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.04 percent of its 13F equity portfolio to POWL.

Due to the fact that Powell Industries, Inc. (NASDAQ:POWL) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there exists a select few funds that elected to cut their positions entirely heading into Q4. Intriguingly, John D. Gillespie’s Prospector Partners dropped the largest stake of the “upper crust” of funds followed by Insider Monkey, worth an estimated $1.5 million in stock. Donald Sussman’s fund, Paloma Partners, also dumped its stock, about $0.4 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 5 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Powell Industries, Inc. (NASDAQ:POWL) but similarly valued. We will take a look at Barrett Business Services, Inc. (NASDAQ:BBSI), El Pollo LoCo Holdings Inc (NASDAQ:LOCO), Corporacion America Airports SA (NYSE:CAAP), and Benefytt Technologies, Inc. (NASDAQ:BFYT). All of these stocks’ market caps are similar to POWL’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $34 million in POWL’s case. Benefytt Technologies, Inc. (NASDAQ:BFYT) is the most popular stock in this table. On the other hand Corporacion America Airports SA (NYSE:CAAP) is the least popular one with only 8 bullish hedge fund positions. Powell Industries, Inc. (NASDAQ:POWL) 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. 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately POWL wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on POWL were disappointed as the stock returned 6.1% during the same time period 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 many of these stocks already outperformed the market so far this year.

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