Hedge Funds Dropped The Ball By Dumping PennyMac Mortgage Investment Trust (PMT)

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 PennyMac Mortgage Investment Trust (NYSE:PMT) and determine whether hedge funds skillfully traded this stock.

PennyMac Mortgage Investment Trust (NYSE:PMT) investors should be aware of a decrease in activity from the world’s largest hedge funds recently. PMT was in 12 hedge funds’ portfolios at the end of the first quarter of 2020. There were 19 hedge funds in our database with PMT holdings at the end of the previous quarter. Our calculations also showed that PMT 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.

David Harding

David Harding of Winton Capital 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 review the latest hedge fund action surrounding PennyMac Mortgage Investment Trust (NYSE:PMT).

What does smart money think about PennyMac Mortgage Investment Trust (NYSE:PMT)?

At the end of the first quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -37% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in PMT over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in PennyMac Mortgage Investment Trust (NYSE:PMT) was held by Rima Senvest Management, which reported holding $21.9 million worth of stock at the end of September. It was followed by Winton Capital Management with a $9.1 million position. Other investors bullish on the company included Renaissance Technologies, OCO Capital Partners, and Citadel Investment Group. In terms of the portfolio weights assigned to each position OCO Capital Partners allocated the biggest weight to PennyMac Mortgage Investment Trust (NYSE:PMT), around 5.85% of its 13F portfolio. Rima Senvest Management is also relatively very bullish on the stock, designating 2.56 percent of its 13F equity portfolio to PMT.

Because PennyMac Mortgage Investment Trust (NYSE:PMT) has experienced falling interest from hedge fund managers, logic holds that there were a few hedgies that slashed their entire stakes heading into Q4. It’s worth mentioning that Charles Clough’s Clough Capital Partners dumped the largest position of the 750 funds tracked by Insider Monkey, valued at an estimated $22.3 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also cut its stock, about $7.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 7 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to PennyMac Mortgage Investment Trust (NYSE:PMT). We will take a look at Gray Television, Inc. (NYSE:GTN), Myriad Genetics, Inc. (NASDAQ:MYGN), United States Steel Corporation (NYSE:X), and Kaman Corporation (NYSE:KAMN). This group of stocks’ market values are closest to PMT’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GTN 21 131988 -3
MYGN 11 102643 -4
X 17 36676 -9
KAMN 13 137686 -6
Average 15.5 102248 -5.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $102 million. That figure was $56 million in PMT’s case. Gray Television, Inc. (NYSE:GTN) is the most popular stock in this table. On the other hand Myriad Genetics, Inc. (NASDAQ:MYGN) is the least popular one with only 11 bullish hedge fund positions. PennyMac Mortgage Investment Trust (NYSE:PMT) is not the least popular stock in this group but hedge fund interest is still below average. 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 PMT as the stock returned 69.1% during 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.