Were Hedge Funds Right About PennyMac Financial Services Inc (PFSI)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards PennyMac Financial Services Inc (NYSE:PFSI) and determine whether hedge funds skillfully traded this stock.

Is PennyMac Financial Services Inc (NYSE:PFSI) going to take off soon? Money managers were in a bullish mood. The number of bullish hedge fund bets went up by 7 lately. PennyMac Financial Services Inc (NYSE:PFSI) was in 33 hedge funds’ portfolios at the end of September. The all time high for this statistic was previously 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that PFSI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so 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. With all of this in mind let’s check out the key hedge fund action encompassing PennyMac Financial Services Inc (NYSE:PFSI).

Matthew Lindenbaum of Basswood Capital

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

At Q3’s end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 27% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in PFSI a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, MFN Partners, managed by Farhad Nanji and Michael DeMichele, holds the number one position in PennyMac Financial Services Inc (NYSE:PFSI). MFN Partners has a $215.9 million position in the stock, comprising 9.9% of its 13F portfolio. The second most bullish fund manager is Rima Senvest Management, led by Richard Mashaal, holding a $123.3 million position; the fund has 3.5% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions comprise Matthew Lindenbaum’s Basswood Capital, Charles Clough’s Clough Capital Partners and Paul Reeder and Edward Shapiro’s PAR Capital Management. In terms of the portfolio weights assigned to each position MFN Partners allocated the biggest weight to PennyMac Financial Services Inc (NYSE:PFSI), around 9.9% of its 13F portfolio. Basswood Capital is also relatively very bullish on the stock, dishing out 4.76 percent of its 13F equity portfolio to PFSI.

Consequently, key money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the largest position in PennyMac Financial Services Inc (NYSE:PFSI). Arrowstreet Capital had $3.4 million invested in the company at the end of the quarter. Mika Toikka’s AlphaCrest Capital Management also made a $2.6 million investment in the stock during the quarter. The following funds were also among the new PFSI investors: Paul Tudor Jones’s Tudor Investment Corp, Jinghua Yan’s TwinBeech Capital, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s now take a look at hedge fund activity in other stocks similar to PennyMac Financial Services Inc (NYSE:PFSI). We will take a look at Eastern Bankshares, Inc. (NASDAQ:EBC), Tronox Holdings Plc (NYSE:TROX), Definitive Healthcare Corp. (NASDAQ:DH), Moelis & Company (NYSE:MC), Summit Materials Inc (NYSE:SUM), Fabrinet (NYSE:FN), and MaxLinear, Inc. (NASDAQ:MXL). This group of stocks’ market values are similar to PFSI’s market value.

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As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $741 million in PFSI’s case. Tronox Holdings Plc (NYSE:TROX) is the most popular stock in this table. On the other hand Fabrinet (NYSE:FN) is the least popular one with only 18 bullish hedge fund positions. PennyMac Financial Services Inc (NYSE:PFSI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PFSI is 77.5. 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 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 and still managed to beat the market by another 3.6 percentage points. Hedge funds were somewhat right about betting on PFSI as the stock returned 2.9% since the end of September (through January 31st) and outperformed the top 5 hedge fund stocks but not the market. This is a rare phenomenon as top hedge fund stocks usually beat the market over the long-term.

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