Hedge Funds Never Been Less Bullish On PagSeguro Digital Ltd. (PAGS)

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.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether PagSeguro Digital Ltd. (NYSE:PAGS) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

PagSeguro Digital Ltd. (NYSE:PAGS) investors should be aware of a decrease in hedge fund interest of late. Our calculations also showed that PAGS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
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 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. Keeping this in mind let’s take a look at the key hedge fund action encompassing PagSeguro Digital Ltd. (NYSE:PAGS).

How are hedge funds trading PagSeguro Digital Ltd. (NYSE:PAGS)?

Heading into the first quarter of 2020, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PAGS over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PAGS A Good Stock To Buy?

More specifically, Sylebra Capital Management was the largest shareholder of PagSeguro Digital Ltd. (NYSE:PAGS), with a stake worth $288.5 million reported as of the end of September. Trailing Sylebra Capital Management was Samlyn Capital, which amassed a stake valued at $103.5 million. Steadfast Capital Management, Echo Street Capital Management, and Tekne Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Tekne Capital Management allocated the biggest weight to PagSeguro Digital Ltd. (NYSE:PAGS), around 21.83% of its 13F portfolio. Marcho Partners is also relatively very bullish on the stock, designating 11.43 percent of its 13F equity portfolio to PAGS.

Since PagSeguro Digital Ltd. (NYSE:PAGS) has experienced falling interest from the aggregate hedge fund industry, it’s easy to see that there were a few hedge funds who were dropping their positions entirely last quarter. Intriguingly, Gabriel Plotkin’s Melvin Capital Management sold off the largest investment of the “upper crust” of funds tracked by Insider Monkey, comprising close to $247.5 million in stock, and Dennis Puri and Oliver Keller’s Hunt Lane Capital was right behind this move, as the fund dropped about $74.3 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 15 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as PagSeguro Digital Ltd. (NYSE:PAGS) but similarly valued. We will take a look at The Western Union Company (NYSE:WU), Jack Henry & Associates, Inc. (NASDAQ:JKHY), Vistra Energy Corp. (NYSE:VST), and Datadog, Inc. (NASDAQ:DDOG). All of these stocks’ market caps resemble PAGS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WU 29 394713 6
JKHY 29 259780 8
VST 49 2192176 4
DDOG 32 439020 -7
Average 34.75 821422 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.75 hedge funds with bullish positions and the average amount invested in these stocks was $821 million. That figure was $802 million in PAGS’s case. Vistra Energy Corp. (NYSE:VST) is the most popular stock in this table. On the other hand The Western Union Company (NYSE:WU) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks PagSeguro Digital Ltd. (NYSE:PAGS) is even less popular than WU. Hedge funds dodged a bullet by taking a bearish stance towards PAGS. Our calculations showed that the top 20 most popular hedge fund stocks 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 managed to beat the market by 3.2 percentage points. Unfortunately PAGS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PAGS investors were disappointed as the stock returned -40.9% 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 most of these stocks already outperformed the market so far in Q1.

Disclosure: None. This article was originally published at Insider Monkey.