Primo Water Corporation (PRMW): Are Hedge Funds Right About This Stock?

Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. Between November 1, 2014 and October 30 of this year, less than 49% of the stocks in the S&P 500 beat the market. However, hedge funds’ top 30 stock picks from the index had a much higher success rate than this, at 63%. The returns from these 30 stocks also easily bested the broader market, at 9.5% compared to 5.2%, despite there being a few duds in there like Micron and Anadarko (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.

Primo Water Corporation (NASDAQ:PRMW) has seen an increase in hedge fund interest recently. PRMW was in 10 hedge funds’ portfolios at the end of September, gaining popularity amid a 75% growth registered by the stock in the first nine months of 2015.  However, the level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Inotek Pharmaceuticals Corp (NASDAQ:ITEK), and Lawson Products, Inc. (NASDAQ:LAWS) to gather more data points.

In the eyes of most market participants, hedge funds are assumed to be worthless, old financial tools of yesteryear. While there are greater than 8000 funds with their doors open at present, We hone in on the moguls of this club, about 700 funds. It is estimated that this group of investors preside over bulk of the hedge fund industry’s total capital, and by observing their best stock picks, Insider Monkey has brought to light several investment strategies that have historically surpassed the broader indices. Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points a year for a decade in their back tests.

Keeping this in mind, let’s take a look at the new action encompassing Primo Water Corporation (NASDAQ:PRMW).

How have hedgies been trading Primo Water Corporation (NASDAQ:PRMW)?

At the end of the third quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, an increase of 43% from one quarter earlier. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Wynnefield Capital, managed by Nelson Obus, holds the most valuable position in Primo Water Corporation (NASDAQ:PRMW). Wynnefield Capital has a $13.5 million position in the stock, comprising 5.4% of its 13F portfolio. Sitting at the No. 2 spot is Manatuck Hill Partners, led by Mark Broach, holding a $13.5 million position; the fund has 5.7% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish encompass Charles Akre’s Akre Capital Management, Jim Simons’ Renaissance Technologies, and Adam Wright and Gary Kohler’s Blue Clay Capital.

As one would reasonably expect, specific money managers were breaking ground themselves. Blue Clay Capital, initiated the biggest position in Primo Water Corporation (NASDAQ:PRMW), which was worth $0.3 million at the end of the quarter. Ken Grossman and Glen Schneider’s SG Capital Management also initiated a $0.3 million position. The following funds were also among the new PRMW investors: Josh Goldberg’s G2 Investment Partners Management, Israel Englander’s Millennium Management, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now review hedge fund activity in other stocks similar to Primo Water Corporation (NASDAQ:PRMW). These stocks are Inotek Pharmaceuticals Corp (NASDAQ:ITEK), Lawson Products, Inc. (NASDAQ:LAWS),  and Nabriva Therapeutics AG-ADR (NASDAQ:NBRV). This group of stocks’ market valuations are closest to PRMW’s market valuation.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $23 million, which is considerably lower than the $43 million in PRMW’s case. Inotek Pharmaceuticals Corp (NASDAQ:ITEK) is the most popular stock in this table. On the other hand Lawson Products, Inc. (NASDAQ:LAWS) is the least popular one with only 6 bullish hedge fund positions. Primo Water Corporation (NASDAQ:PRMW) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ITEK might be a better candidate to consider a long position.