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Did Hedge Funds Make The Right Call On Principal Financial Group Inc (PFG) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Principal Financial Group Inc (NASDAQ:PFG) and determine whether hedge funds had an edge regarding this stock.

Principal Financial Group Inc (NASDAQ:PFG) was in 27 hedge funds’ portfolios at the end of the first quarter of 2020. PFG investors should be aware of an increase in support from the world’s most elite money managers recently. There were 20 hedge funds in our database with PFG holdings at the end of the previous quarter. Our calculations also showed that PFG 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 has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

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. Keeping this in mind let’s take a look at the latest hedge fund action surrounding Principal Financial Group Inc (NASDAQ:PFG).

How have hedgies been trading Principal Financial Group Inc (NASDAQ:PFG)?

At Q1’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 35% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in PFG over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

The largest stake in Principal Financial Group Inc (NASDAQ:PFG) was held by Prana Capital Management, which reported holding $17.4 million worth of stock at the end of September. It was followed by D E Shaw with a $14.8 million position. Other investors bullish on the company included Gillson Capital, Millennium Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Prana Capital Management allocated the biggest weight to Principal Financial Group Inc (NASDAQ:PFG), around 5.06% of its 13F portfolio. Gillson Capital is also relatively very bullish on the stock, earmarking 2.14 percent of its 13F equity portfolio to PFG.

As industrywide interest jumped, specific money managers were breaking ground themselves. Gillson Capital, managed by Daniel Johnson, assembled the biggest position in Principal Financial Group Inc (NASDAQ:PFG). Gillson Capital had $12.7 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $9.4 million position during the quarter. The following funds were also among the new PFG investors: Dmitry Balyasny’s Balyasny Asset Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Ken Griffin’s Citadel Investment Group.

Let’s go over hedge fund activity in other stocks similar to Principal Financial Group Inc (NASDAQ:PFG). We will take a look at DENTSPLY SIRONA Inc. (NASDAQ:XRAY), ViacomCBS Inc. (NASDAQ:VIAC), Regions Financial Corporation (NYSE:RF), and Universal Health Services, Inc. (NYSE:UHS). This group of stocks’ market caps match PFG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
XRAY 30 996924 2
VIAC 54 952791 -10
RF 37 235284 0
UHS 30 443724 -1
Average 37.75 657181 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.75 hedge funds with bullish positions and the average amount invested in these stocks was $657 million. That figure was $119 million in PFG’s case. ViacomCBS Inc. (NASDAQ:VIAC) is the most popular stock in this table. On the other hand DENTSPLY SIRONA Inc. (NASDAQ:XRAY) is the least popular one with only 30 bullish hedge fund positions. Compared to these stocks Principal Financial Group Inc (NASDAQ:PFG) is even less popular than XRAY. Hedge funds clearly dropped the ball on PFG as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on PFG as the stock returned 34.4% in the second quarter and outperformed the market by an even larger margin.

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