Hedge Funds Are Wrong About The Providence Service Corporation (PRSC)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards The Providence Service Corporation (NASDAQ:PRSC) and determine whether hedge funds skillfully traded this stock.

The Providence Service Corporation (NASDAQ:PRSC) investors should be aware of a decrease in hedge fund interest recently. Our calculations also showed that PRSC 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.

In the financial world there are plenty of gauges shareholders put to use to evaluate stocks. Two of the best gauges are hedge fund and insider trading interest. Our researchers have shown that, historically, those who follow the top picks of the top hedge fund managers can outpace the market by a very impressive margin (see the details here).

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

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. With all of this in mind we’re going to take a look at the new hedge fund action encompassing The Providence Service Corporation (NASDAQ:PRSC).

How have hedgies been trading The Providence Service Corporation (NASDAQ:PRSC)?

Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PRSC over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is PRSC A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Renaissance Technologies,  holds the largest position in The Providence Service Corporation (NASDAQ:PRSC). Renaissance Technologies has a $50.1 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Sitting at the No. 2 spot is Christopher Shackelton and Adam Gray of Coliseum Capital, with a $47.7 million position; 12.9% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that are bullish comprise Amy Minella’s Cardinal Capital, Jeremy Carton and Gilbert Li’s Alta Fundamental Advisers and C. Jonathan Gattman’s Cloverdale Capital Management. In terms of the portfolio weights assigned to each position Coliseum Capital allocated the biggest weight to The Providence Service Corporation (NASDAQ:PRSC), around 12.92% of its 13F portfolio. Alta Fundamental Advisers is also relatively very bullish on the stock, designating 12.41 percent of its 13F equity portfolio to PRSC.

Due to the fact that The Providence Service Corporation (NASDAQ:PRSC) has experienced falling interest from hedge fund managers, logic holds that there were a few money managers that decided to sell off their full holdings heading into Q4. It’s worth mentioning that Noam Gottesman’s GLG Partners sold off the biggest investment of all the hedgies monitored by Insider Monkey, valued at close to $1 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund sold off about $0.9 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as The Providence Service Corporation (NASDAQ:PRSC) but similarly valued. These stocks are Transocean Ltd (NYSE:RIG), Granite Construction Incorporated (NYSE:GVA), Arcos Dorados Holding Inc (NYSE:ARCO), and Tronox Holdings Plc (NYSE:TROX). This group of stocks’ market valuations resemble PRSC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RIG 21 117370 -5
GVA 16 45982 9
ARCO 12 36064 -1
TROX 17 52262 -6
Average 16.5 62920 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $143 million in PRSC’s case. Transocean Ltd (NYSE:RIG) is the most popular stock in this table. On the other hand Arcos Dorados Holding Inc (NYSE:ARCO) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks The Providence Service Corporation (NASDAQ:PRSC) is even less popular than ARCO. Hedge funds clearly dropped the ball on PRSC 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 PRSC as the stock returned 43.8% 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.