Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 Pure Storage, Inc. (NYSE:PSTG).
Is Pure Storage, Inc. (NYSE:PSTG) a healthy stock for your portfolio? Prominent investors are in a bearish mood. The number of long hedge fund bets were trimmed by 6 lately. Our calculations also showed that PSTG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
We leave no stone unturned when looking for the next great investment idea. For example we recently We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the key hedge fund action regarding Pure Storage, Inc. (NYSE:PSTG).
Hedge fund activity in Pure Storage, Inc. (NYSE:PSTG)
At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PSTG over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Ricky Sandler’s Eminence Capital has the largest position in Pure Storage, Inc. (NYSE:PSTG), worth close to $180.4 million, accounting for 2% of its total 13F portfolio. Coming in second is Citadel Investment Group, managed by Ken Griffin, which holds a $69.3 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish contain Renaissance Technologies, D. E. Shaw’s D E Shaw and Anand Parekh’s Alyeska Investment Group. In terms of the portfolio weights assigned to each position Eminence Capital allocated the biggest weight to Pure Storage, Inc. (NYSE:PSTG), around 2.03% of its 13F portfolio. Boardman Bay Capital Managemen is also relatively very bullish on the stock, earmarking 1.91 percent of its 13F equity portfolio to PSTG.
Judging by the fact that Pure Storage, Inc. (NYSE:PSTG) has experienced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of money managers who were dropping their full holdings by the end of the third quarter. Interestingly, Ahmet Okumus’s Okumus Fund Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $48.9 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also cut its stock, about $31.3 million worth. These transactions are interesting, as total hedge fund interest dropped by 6 funds by the end of the third quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Pure Storage, Inc. (NYSE:PSTG) but similarly valued. These stocks are Enstar Group Ltd. (NASDAQ:ESGR), GrubHub Inc (NYSE:GRUB), VEON Ltd. (NASDAQ:VEON), and Cyberark Software Ltd (NASDAQ:CYBR). This group of stocks’ market valuations resemble PSTG’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $311 million. That figure was $470 million in PSTG’s case. GrubHub Inc (NYSE:GRUB) is the most popular stock in this table. On the other hand VEON Ltd. (NASDAQ:VEON) 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. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately PSTG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PSTG were disappointed as the stock returned -26.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.