Were Hedge Funds Right About Piling Into Perspecta Inc. (PRSP)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Perspecta Inc. (NYSE:PRSP) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Perspecta Inc. (NYSE:PRSP) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. Perspecta Inc. (NYSE:PRSP) was in 46 hedge funds’ portfolios at the end of June. The all time high for this statistics is 50. Our calculations also showed that PRSP 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).

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.

Barry Rosenstein of JANA Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar 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. Keeping this in mind let’s take a glance at the recent hedge fund action regarding Perspecta Inc. (NYSE:PRSP).

How are hedge funds trading Perspecta Inc. (NYSE:PRSP)?

Heading into the third quarter of 2020, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 44% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in PRSP over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, JANA Partners held the most valuable stake in Perspecta Inc. (NYSE:PRSP), which was worth $217.5 million at the end of the third quarter. On the second spot was Samlyn Capital which amassed $43.5 million worth of shares. D E Shaw, Point72 Asset Management, and Maverick Capital 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 JANA Partners allocated the biggest weight to Perspecta Inc. (NYSE:PRSP), around 20.42% of its 13F portfolio. Lion Point is also relatively very bullish on the stock, setting aside 5.07 percent of its 13F equity portfolio to PRSP.

With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. JANA Partners, managed by Barry Rosenstein, initiated the most valuable position in Perspecta Inc. (NYSE:PRSP). JANA Partners had $217.5 million invested in the company at the end of the quarter. Michael Doheny’s Freshford Capital Management also made a $22.2 million investment in the stock during the quarter. The following funds were also among the new PRSP investors: Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Israel Englander’s Millennium Management, and Kenneth Squire’s 13D Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Perspecta Inc. (NYSE:PRSP) but similarly valued. These stocks are BRP Inc. (NASDAQ:DOOO), Curtiss-Wright Corp. (NYSE:CW), YETI Holdings, Inc. (NYSE:YETI), Flowserve Corporation (NYSE:FLS), Grocery Outlet Holding Corp. (NASDAQ:GO), Tempur Sealy International Inc. (NYSE:TPX), and Dicks Sporting Goods Inc (NYSE:DKS). This group of stocks’ market valuations match PRSP’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.1 hedge funds with bullish positions and the average amount invested in these stocks was $353 million. That figure was $654 million in PRSP’s case. Tempur Sealy International Inc. (NYSE:TPX) is the most popular stock in this table. On the other hand BRP Inc. (NASDAQ:DOOO) is the least popular one with only 14 bullish hedge fund positions. Perspecta Inc. (NYSE:PRSP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PRSP is 87.6. 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 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately PRSP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PRSP were disappointed as the stock returned -15.9% since the end of June (through 10/23) 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.