Hedge Funds Are Buying Pure Storage, Inc. (PSTG)

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Pure Storage, Inc. (NYSE:PSTG).

Pure Storage, Inc. (NYSE:PSTG) shareholders have witnessed an increase in hedge fund interest lately. Pure Storage, Inc. (NYSE:PSTG) was in 30 hedge funds’ portfolios at the end of March. The all time high for this statistic is 35. There were 21 hedge funds in our database with PSTG positions at the end of the fourth quarter. Our calculations also showed that PSTG isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

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Ricky Sandler of Eminence Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to take a glance at the new hedge fund action surrounding Pure Storage, Inc. (NYSE:PSTG).

Do Hedge Funds Think PSTG Is A Good Stock To Buy Now?

Heading into the second quarter of 2021, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 43% from one quarter earlier. On the other hand, there were a total of 25 hedge funds with a bullish position in PSTG a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in Pure Storage, Inc. (NYSE:PSTG) was held by ARK Investment Management, which reported holding $708.4 million worth of stock at the end of December. It was followed by Eminence Capital with a $130.7 million position. Other investors bullish on the company included Arrowstreet Capital, Renaissance Technologies, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Eminence Capital allocated the biggest weight to Pure Storage, Inc. (NYSE:PSTG), around 1.62% of its 13F portfolio. ARK Investment Management is also relatively very bullish on the stock, designating 1.41 percent of its 13F equity portfolio to PSTG.

As one would reasonably expect, some big names have jumped into Pure Storage, Inc. (NYSE:PSTG) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in Pure Storage, Inc. (NYSE:PSTG). Arrowstreet Capital had $44.1 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $37.5 million position during the quarter. The other funds with new positions in the stock are Anand Parekh’s Alyeska Investment Group, Paul Tudor Jones’s Tudor Investment Corp, and Parvinder Thiara’s Athanor Capital.

Let’s also examine hedge fund activity in other stocks similar to Pure Storage, Inc. (NYSE:PSTG). These stocks are Ingredion Incorporated (NYSE:INGR), Healthcare Trust Of America Inc (NYSE:HTA), Twist Bioscience Corporation (NASDAQ:TWST), Olin Corporation (NYSE:OLN), KT Corporation (NYSE:KT), Brixmor Property Group Inc (NYSE:BRX), and Ardagh Group S.A. (NYSE:ARD). This group of stocks’ market valuations match PSTG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INGR 25 455337 1
HTA 17 119726 3
TWST 24 1115257 1
OLN 34 1170833 11
KT 12 166402 1
BRX 18 127975 12
ARD 11 125401 3
Average 20.1 468704 4.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.1 hedge funds with bullish positions and the average amount invested in these stocks was $469 million. That figure was $1090 million in PSTG’s case. Olin Corporation (NYSE:OLN) is the most popular stock in this table. On the other hand Ardagh Group S.A. (NYSE:ARD) is the least popular one with only 11 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 overall hedge fund sentiment score for PSTG is 77. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.8% in 2021 through July 2nd and beat the market again by 6 percentage points. Unfortunately PSTG wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on PSTG were disappointed as the stock returned -9.7% since the end of March (through 7/2) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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