Were These Hedge Funds Wrong About Piling Into Polaris Inc. (PII)?

In this article we will check out the progression of hedge fund sentiment towards Polaris Inc. (NYSE:PII) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Polaris Inc. (NYSE:PII) has experienced an increase in activity from the world’s largest hedge funds of late. Polaris Inc. (NYSE:PII) was in 34 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 29. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 24 hedge funds in our database with PII holdings at the end of March. Our calculations also showed that PII 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.

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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 Polaris Inc. (NYSE:PII).

Hedge fund activity in Polaris Inc. (NYSE:PII)

At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 42% from the previous quarter. On the other hand, there were a total of 24 hedge funds with a bullish position in PII a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Polaris Inc. (NYSE:PII) was held by Arrowstreet Capital, which reported holding $78.4 million worth of stock at the end of June. It was followed by AQR Capital Management with a $47.5 million position. Other investors bullish on the company included Alyeska Investment Group, Fisher Asset Management, and Silver Heights Capital Management. In terms of the portfolio weights assigned to each position Silver Heights Capital Management allocated the biggest weight to Polaris Inc. (NYSE:PII), around 14.43% of its 13F portfolio. Blue Grotto Capital is also relatively very bullish on the stock, designating 4.75 percent of its 13F equity portfolio to PII.

Consequently, key hedge funds were leading the bulls’ herd. Fisher Asset Management, managed by Ken Fisher, initiated the biggest position in Polaris Inc. (NYSE:PII). Fisher Asset Management had $37.9 million invested in the company at the end of the quarter. Kevin Kuebler and Ming Lam’s Silver Heights Capital Management also made a $29.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Karthik Sarma’s SRS Investment Management, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Steve Cohen’s Point72 Asset Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Polaris Inc. (NYSE:PII) but similarly valued. We will take a look at Inphi Corporation (NASDAQ:IPHI), Autoliv Inc. (NYSE:ALV), HD Supply Holdings Inc (NASDAQ:HDS), Apartment Investment and Management Co. (NYSE:AIV), AppFolio Inc (NASDAQ:APPF), Zions Bancorporation, National Association (NASDAQ:ZION), and Ingredion Incorporated (NYSE:INGR). This group of stocks’ market caps are similar to PII’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $480 million. That figure was $427 million in PII’s case. Inphi Corporation (NASDAQ:IPHI) is the most popular stock in this table. On the other hand AppFolio Inc (NASDAQ:APPF) is the least popular one with only 21 bullish hedge fund positions. Polaris Inc. (NYSE:PII) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PII is 66. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately PII wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PII were disappointed as the stock returned -1.2% since the end of June (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 many of these stocks already outperformed the market so far this year.

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