Were Hedge Funds Right About Piling Into Primo Water Corporation (PRMW)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Primo Water Corporation (NYSE:PRMW) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Primo Water Corporation (NYSE:PRMW) has seen an increase in enthusiasm from smart money in recent months. PRMW was in 36 hedge funds’ portfolios at the end of March. There were 13 hedge funds in our database with PRMW positions at the end of the previous quarter. Our calculations also showed that PRMW 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.

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jim Simons of Renaissance Technologies

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 let’s view the fresh hedge fund action surrounding Primo Water Corporation (NYSE:PRMW).

What does smart money think about Primo Water Corporation (NYSE:PRMW)?

At Q1’s end, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 177% from the fourth quarter of 2019. On the other hand, there were a total of 13 hedge funds with a bullish position in PRMW a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Nitorum Capital held the most valuable stake in Primo Water Corporation (NYSE:PRMW), which was worth $94 million at the end of the third quarter. On the second spot was Levin Easterly Partners which amassed $89.5 million worth of shares. P2 Capital Partners, Interval Partners, and Renaissance Technologies 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 P2 Capital Partners allocated the biggest weight to Primo Water Corporation (NYSE:PRMW), around 8.73% of its 13F portfolio. Nitorum Capital is also relatively very bullish on the stock, earmarking 7.28 percent of its 13F equity portfolio to PRMW.

As aggregate interest increased, specific money managers were breaking ground themselves. Nitorum Capital, managed by Seth Rosen, assembled the most outsized position in Primo Water Corporation (NYSE:PRMW). Nitorum Capital had $94 million invested in the company at the end of the quarter. John Murphy’s Levin Easterly Partners also made a $89.5 million investment in the stock during the quarter. The other funds with brand new PRMW positions are Claus Moller’s P2 Capital Partners, Gregg Moskowitz’s Interval Partners, and Leon Shaulov’s Maplelane Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Primo Water Corporation (NYSE:PRMW) but similarly valued. We will take a look at Pebblebrook Hotel Trust (NYSE:PEB), Hillenbrand, Inc. (NYSE:HI), Worthington Industries, Inc. (NYSE:WOR), and Insmed Incorporated (NASDAQ:INSM). This group of stocks’ market values match PRMW’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $185 million. That figure was $463 million in PRMW’s case. Insmed Incorporated (NASDAQ:INSM) is the most popular stock in this table. On the other hand Pebblebrook Hotel Trust (NYSE:PEB) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Primo Water Corporation (NYSE:PRMW) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PRMW as the stock returned 52.5% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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