We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds’ top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Penske Automotive Group, Inc. (NYSE:PAG).
Penske Automotive Group, Inc. (NYSE:PAG) was in 17 hedge funds’ portfolios at the end of June. PAG investors should pay attention to a decrease in enthusiasm from smart money lately. There were 18 hedge funds in our database with PAG positions at the end of the previous quarter. Our calculations also showed that PAG isn’t among the 30 most popular stocks among hedge funds (view the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s review the fresh hedge fund action surrounding Penske Automotive Group, Inc. (NYSE:PAG).
How have hedgies been trading Penske Automotive Group, Inc. (NYSE:PAG)?
At the end of the second quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in PAG a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Mario Gabelli’s GAMCO Investors has the most valuable position in Penske Automotive Group, Inc. (NYSE:PAG), worth close to $24.2 million, comprising 0.2% of its total 13F portfolio. On GAMCO Investors’s heels is Cliff Asness of AQR Capital Management, with a $11.3 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors with similar optimism encompass Ken Griffin’s Citadel Investment Group, Chuck Royce’s Royce & Associates and Noam Gottesman’s GLG Partners.
Because Penske Automotive Group, Inc. (NYSE:PAG) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there were a few funds that elected to cut their positions entirely by the end of the second quarter. Intriguingly, James Dondero’s Highland Capital Management dumped the biggest position of all the hedgies watched by Insider Monkey, worth an estimated $2.5 million in stock. Mike Vranos’s fund, Ellington, also said goodbye to its stock, about $1.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the second quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Penske Automotive Group, Inc. (NYSE:PAG) but similarly valued. These stocks are Strategic Education, Inc. (NASDAQ:STRA), Clean Harbors Inc (NYSE:CLH), Healthequity Inc (NASDAQ:HQY), and Spark Therapeutics Inc (NASDAQ:ONCE). This group of stocks’ market caps match PAG’s market cap.
|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 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $552 million. That figure was $61 million in PAG’s case. Spark Therapeutics Inc (NASDAQ:ONCE) is the most popular stock in this table. On the other hand Strategic Education, Inc. (NASDAQ:STRA) is the least popular one with only 13 bullish hedge fund positions. Penske Automotive Group, Inc. (NYSE:PAG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately PAG wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PAG investors were disappointed as the stock returned 0.9% during the third quarter 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 in 2019.
Disclosure: None. This article was originally published at Insider Monkey.