Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. 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 Pacific Drilling SA (NYSE:PACD).
Pacific Drilling SA (NYSE:PACD) has experienced an increase in hedge fund interest in recent months. Our calculations also showed that PACD isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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. We’re going to check out the recent hedge fund action regarding Pacific Drilling SA (NYSE:PACD).
What have hedge funds been doing with Pacific Drilling SA (NYSE:PACD)?
Heading into the third quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of 50% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PACD over the last 16 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Pacific Drilling SA (NYSE:PACD) was held by Strategic Value Partners, which reported holding $243.5 million worth of stock at the end of March. It was followed by Avenue Capital with a $240.6 million position. Other investors bullish on the company included Abrams Capital Management, Whitebox Advisors, and Highbridge Capital Management.
As one would reasonably expect, key money managers have jumped into Pacific Drilling SA (NYSE:PACD) headfirst. Millennium Management, managed by Israel Englander, assembled the most outsized position in Pacific Drilling SA (NYSE:PACD). Millennium Management had $2.9 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $1 million position during the quarter. The only other fund with a new position in the stock is Michael Gelband’s ExodusPoint Capital.
Let’s check out hedge fund activity in other stocks similar to Pacific Drilling SA (NYSE:PACD). We will take a look at CTS Corporation (NYSE:CTS), General American Investors Company, Inc. (NYSE:GAM), CIRCOR International, Inc. (NYSE:CIR), and Navigant Consulting, Inc. (NYSE:NCI). This group of stocks’ market values are similar to PACD’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CTS | 9 | 80933 | -1 |
| GAM | 5 | 128273 | 0 |
| CIR | 10 | 175397 | 3 |
| NCI | 11 | 52264 | -4 |
| Average | 8.75 | 109217 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $109 million. That figure was $670 million in PACD’s case. Navigant Consulting, Inc. (NYSE:NCI) is the most popular stock in this table. On the other hand General American Investors Company, Inc.(NYSE:GAM) is the least popular one with only 5 bullish hedge fund positions. Pacific Drilling SA (NYSE:PACD) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately PACD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PACD were disappointed as the stock returned -69% 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 this year.
Disclosure: None. This article was originally published at Insider Monkey.
