Did Hedge Funds Make The Right Call On Patterson Companies, Inc. (PDCO) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Patterson Companies, Inc. (NASDAQ:PDCO) based on that data and determine whether they were really smart about the stock.

Patterson Companies, Inc. (NASDAQ:PDCO) was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. PDCO shareholders have witnessed a decrease in enthusiasm from smart money lately. There were 25 hedge funds in our database with PDCO positions at the end of the previous quarter. Our calculations also showed that PDCO 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.

Jeffrey Bronchick - Cove Street Capital

Jeffrey Bronchick of Cove Street Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let’s take a look at the key hedge fund action regarding Patterson Companies, Inc. (NASDAQ:PDCO).

What have hedge funds been doing with Patterson Companies, Inc. (NASDAQ:PDCO)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -32% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PDCO over the last 18 quarters. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, GAMCO Investors held the most valuable stake in Patterson Companies, Inc. (NASDAQ:PDCO), which was worth $24.1 million at the end of the third quarter. On the second spot was Cove Street Capital which amassed $8 million worth of shares. Citadel Investment Group, Two Sigma Advisors, and AQR Capital Management 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 Cove Street Capital allocated the biggest weight to Patterson Companies, Inc. (NASDAQ:PDCO), around 1.64% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, dishing out 0.69 percent of its 13F equity portfolio to PDCO.

Seeing as Patterson Companies, Inc. (NASDAQ:PDCO) has witnessed a decline in interest from hedge fund managers, logic holds that there exists a select few hedge funds who were dropping their full holdings last quarter. Interestingly, Robert Joseph Caruso’s Select Equity Group dropped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, comprising close to $47.5 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also said goodbye to its stock, about $13.4 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 8 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Patterson Companies, Inc. (NASDAQ:PDCO). We will take a look at Inspire Medical Systems, Inc. (NYSE:INSP), AeroVironment, Inc. (NASDAQ:AVAV), Theravance Biopharma Inc (NASDAQ:TBPH), and TransAlta Corporation (NYSE:TAC). This group of stocks’ market valuations are closest to PDCO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INSP 25 335263 4
AVAV 10 51290 -3
TBPH 14 335681 1
TAC 15 55063 5
Average 16 194324 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $194 million. That figure was $55 million in PDCO’s case. Inspire Medical Systems, Inc. (NYSE:INSP) is the most popular stock in this table. On the other hand AeroVironment, Inc. (NASDAQ:AVAV) is the least popular one with only 10 bullish hedge fund positions. Patterson Companies, Inc. (NASDAQ:PDCO) is not the most popular stock in this group but hedge fund interest is still above average. 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on PDCO as the stock returned 70.6% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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