Is PS Business Parks Inc (PSB) Going to Burn These Hedge Funds?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Third Point because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

PS Business Parks Inc (NYSE:PSB) shares didn’t see a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 7 hedge funds’ portfolios at the end of September. At the end of this article we will also compare PSB to other stocks including National Health Investors Inc (NYSE:NHI), Fresh Del Monte Produce Inc (NYSE:FDP), and Worthington Industries, Inc. (NYSE:WOR) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

Keeping this in mind, we’re going to take a look at the recent action surrounding PS Business Parks Inc (NYSE:PSB).

What have hedge funds been doing with PS Business Parks Inc (NYSE:PSB)?

Heading into the fourth quarter of 2016, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2016. The graph below displays the number of hedge funds with bullish position in PSB over the last 5 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Millennium Management, one of the biggest hedge funds in the world, has the number one position in PS Business Parks Inc (NYSE:PSB), worth close to $38.6 million, amounting to 0.1% of its total 13F portfolio. Coming in second is Jim Simons of Renaissance Technologies, with a $26.7 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Other professional money managers that are bullish comprise Greg Poole’s Echo Street Capital Management, Cliff Asness’s AQR Capital Management and John Overdeck and David Siegel’s Two Sigma Advisors. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was D E Shaw).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as PS Business Parks Inc (NYSE:PSB) but similarly valued. These stocks are National Health Investors Inc (NYSE:NHI), Fresh Del Monte Produce Inc (NYSE:FDP), Worthington Industries, Inc. (NYSE:WOR), and Science Applications International Corp (NYSE:SAIC). All of these stocks’ market caps are closest to PSB’s market cap.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $107 million. That figure was $90 million in PSB’s case. Fresh Del Monte Produce Inc (NYSE:FDP) is the most popular stock in this table. On the other hand National Health Investors Inc (NYSE:NHI) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks PS Business Parks Inc (NYSE:PSB) is even less popular than NHI. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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