Did Hedge Funds Make The Right Call On Pegasystems Inc. (PEGA) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtPegasystems Inc. (NASDAQ:PEGA) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Pegasystems Inc. (NASDAQ:PEGA) was in 33 hedge funds’ portfolios at the end of the first quarter of 2020. PEGA investors should pay attention to an increase in hedge fund interest recently. There were 25 hedge funds in our database with PEGA holdings at the end of the previous quarter. Our calculations also showed that PEGA 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

Christian Leone of Luxor Capital Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s analyze the recent hedge fund action regarding Pegasystems Inc. (NASDAQ:PEGA).

How have hedgies been trading Pegasystems Inc. (NASDAQ:PEGA)?

At the end of the first quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 32% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PEGA over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Bares Capital Management, managed by Brian Bares, holds the most valuable position in Pegasystems Inc. (NASDAQ:PEGA). Bares Capital Management has a $287.7 million position in the stock, comprising 10.4% of its 13F portfolio. The second largest stake is held by Christian Leone of Luxor Capital Group, with a $248.5 million position; the fund has 7.5% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that hold long positions consist of Eric Bannasch’s Cadian Capital, Amish Mehta’s SQN Investors and Ken Fisher’s Fisher Asset Management. In terms of the portfolio weights assigned to each position Totem Point Management allocated the biggest weight to Pegasystems Inc. (NASDAQ:PEGA), around 13.12% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, earmarking 10.37 percent of its 13F equity portfolio to PEGA.

Now, key money managers were breaking ground themselves. Praesidium Investment Management Company, managed by Kevin Oram and Peter Uddo, established the biggest position in Pegasystems Inc. (NASDAQ:PEGA). Praesidium Investment Management Company had $35.1 million invested in the company at the end of the quarter. Zach Petrone’s Highside Global Management also made a $8.9 million investment in the stock during the quarter. The following funds were also among the new PEGA investors: Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, Highbridge Capital Management, and Jeffrey Hoffner’s Engle Capital.

Let’s go over hedge fund activity in other stocks similar to Pegasystems Inc. (NASDAQ:PEGA). We will take a look at Huaneng Power International Inc (NYSE:HNP), Commerce Bancshares, Inc. (NASDAQ:CBSH), Penumbra Inc (NYSE:PEN), and Federal Realty Investment Trust (NYSE:FRT). All of these stocks’ market caps are closest to PEGA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HNP 3 2437 0
CBSH 15 44791 5
PEN 20 247173 -10
FRT 24 78227 2
Average 15.5 93157 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $93 million. That figure was $1024 million in PEGA’s case. Federal Realty Investment Trust (NYSE:FRT) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Pegasystems Inc. (NASDAQ:PEGA) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PEGA as the stock returned 42.1% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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