We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards PulteGroup, Inc. (NYSE:PHM).
PulteGroup, Inc. (NYSE:PHM) has experienced an increase in enthusiasm from smart money in recent months. PHM was in 34 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 31 hedge funds in our database with PHM holdings at the end of the previous quarter. Our calculations also showed that PHM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below 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 identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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 check out the key hedge fund action surrounding PulteGroup, Inc. (NYSE:PHM).
Hedge fund activity in PulteGroup, Inc. (NYSE:PHM)
Heading into the first quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in PHM over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in PulteGroup, Inc. (NYSE:PHM) was held by AQR Capital Management, which reported holding $337.6 million worth of stock at the end of September. It was followed by GLG Partners with a $132 million position. Other investors bullish on the company included Greenhaven Associates, Two Sigma Advisors, and Millennium Management. In terms of the portfolio weights assigned to each position Hi-Line Capital Management allocated the biggest weight to PulteGroup, Inc. (NYSE:PHM), around 3.42% of its 13F portfolio. Sustainable Insight Capital Management is also relatively very bullish on the stock, setting aside 2.94 percent of its 13F equity portfolio to PHM.
As industrywide interest jumped, key hedge funds have jumped into PulteGroup, Inc. (NYSE:PHM) headfirst. Winton Capital Management, managed by David Harding, initiated the biggest position in PulteGroup, Inc. (NYSE:PHM). Winton Capital Management had $11.5 million invested in the company at the end of the quarter. Kevin Parker’s Sustainable Insight Capital Management also initiated a $2.8 million position during the quarter. The following funds were also among the new PHM investors: Donald Sussman’s Paloma Partners, Nathan Przybylo’s L2 Asset Management, and Bruce Kovner’s Caxton Associates LP.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as PulteGroup, Inc. (NYSE:PHM) but similarly valued. These stocks are Bausch Health Companies (NYSE:BHC), Weibo Corp (NASDAQ:WB), Pinterest, Inc. (NYSE:PINS), and NiSource Inc. (NYSE:NI). This group of stocks’ market values resemble PHM’s market value.
|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 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $1104 million. That figure was $734 million in PHM’s case. Pinterest, Inc. (NYSE:PINS) is the most popular stock in this table. On the other hand Weibo Corp (NASDAQ:WB) is the least popular one with only 11 bullish hedge fund positions. PulteGroup, Inc. (NYSE:PHM) 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately PHM wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on PHM were disappointed as the stock returned -37.7% 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.
Disclosure: None. This article was originally published at Insider Monkey.