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Did Hedge Funds Drop The Ball On Pure Storage, Inc. (PSTG) ?

It was a rough fourth quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. This was the case with hedge funds, who we heard were pulling money from the market amid the volatility, which included money from small-cap stocks, which they invest in at a higher rate than other investors. This action contributed to the greater decline in these stocks during the tumultuous period. We will study how this market volatility affected their sentiment towards Pure Storage, Inc. (NYSE:PSTG) during the quarter below.

Is Pure Storage, Inc. (NYSE:PSTG) worth your attention right now? Investors who are in the know are in a pessimistic mood. The number of long hedge fund positions shrunk by 5 in recent months. Our calculations also showed that PSTG isn’t among the 30 most popular stocks among hedge funds. PSTG was in 26 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 31 hedge funds in our database with PSTG holdings at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ahmet Okumus - Okumus Capital

Let’s check out the fresh hedge fund action surrounding Pure Storage, Inc. (NYSE:PSTG).

How are hedge funds trading Pure Storage, Inc. (NYSE:PSTG)?

Heading into the first quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -16% from the second quarter of 2018. By comparison, 25 hedge funds held shares or bullish call options in PSTG a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

PSTG_apr2019

More specifically, Citadel Investment Group was the largest shareholder of Pure Storage, Inc. (NYSE:PSTG), with a stake worth $122 million reported as of the end of September. Trailing Citadel Investment Group was Renaissance Technologies, which amassed a stake valued at $111.7 million. Polar Capital, Two Sigma Advisors, and Columbus Circle Investors were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Pure Storage, Inc. (NYSE:PSTG) has experienced declining sentiment from hedge fund managers, it’s safe to say that there were a few money managers that elected to cut their full holdings last quarter. Interestingly, Brad Gerstner’s Altimeter Capital Management sold off the largest position of all the hedgies monitored by Insider Monkey, totaling about $64.9 million in stock. Bruce Garelick’s fund, Garelick Capital Partners, also dumped its stock, about $13 million worth. These transactions are important to note, as total hedge fund interest dropped by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Pure Storage, Inc. (NYSE:PSTG). We will take a look at InterXion Holding NV (NYSE:INXN), Pilgrim’s Pride Corporation (NASDAQ:PPC), 51job, Inc. (NASDAQ:JOBS), and Blackstone Mortgage Trust Inc (NYSE:BXMT). This group of stocks’ market values are closest to PSTG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INXN 28 636554 -3
PPC 17 111166 1
JOBS 13 24137 -1
BXMT 16 129325 2
Average 18.5 225296 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $225 million. That figure was $454 million in PSTG’s case. InterXion Holding NV (NYSE:INXN) is the most popular stock in this table. On the other hand 51job, Inc. (NASDAQ:JOBS) is the least popular one with only 13 bullish hedge fund positions. Pure Storage, Inc. (NYSE:PSTG) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on PSTG as the stock returned 41.8% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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