Hedge Funds Never Been This Bullish On Purple Innovation, Inc. (PRPL)

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 Purple Innovation, Inc. (NASDAQ:PRPL) and determine whether hedge funds skillfully traded this stock.

Purple Innovation, Inc. (NASDAQ:PRPL) shareholders have witnessed an increase in activity from the world’s largest hedge funds lately. Purple Innovation, Inc. (NASDAQ:PRPL) was in 28 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 14. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 14 hedge funds in our database with PRPL positions at the end of the first quarter. Our calculations also showed that PRPL isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

Mark Kingdon - Kingdon Capital

Mark Kingdon of Kingdon Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s check out the recent hedge fund action regarding Purple Innovation, Inc. (NASDAQ:PRPL).

How are hedge funds trading Purple Innovation, Inc. (NASDAQ:PRPL)?

At second quarter’s end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 100% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards PRPL over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Purple Innovation, Inc. (NASDAQ:PRPL) was held by Coliseum Capital, which reported holding $180.5 million worth of stock at the end of September. It was followed by Woodson Capital Management with a $48.6 million position. Other investors bullish on the company included Scopus Asset Management, Driehaus Capital, and Kingdon Capital. In terms of the portfolio weights assigned to each position Coliseum Capital allocated the biggest weight to Purple Innovation, Inc. (NASDAQ:PRPL), around 26.33% of its 13F portfolio. Stormborn Capital Management is also relatively very bullish on the stock, earmarking 6.83 percent of its 13F equity portfolio to PRPL.

As one would reasonably expect, some big names were breaking ground themselves. Scopus Asset Management, managed by Alexander Mitchell, created the largest position in Purple Innovation, Inc. (NASDAQ:PRPL). Scopus Asset Management had $20.1 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also made a $16.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Jeff Osher’s No Street Capital, David Fiszel’s Honeycomb Asset Management, and Elise Di Vincenzo Crumbine’s Stormborn Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Purple Innovation, Inc. (NASDAQ:PRPL) but similarly valued. We will take a look at Chase Corporation (NYSE:CCF), ATN International, Inc. (NASDAQ:ATNI), Renewable Energy Group Inc (NASDAQ:REGI), Tompkins Financial Corporation (NYSE:TMP), Dynavax Technologies Corporation (NASDAQ:DVAX), Re/Max Holdings Inc (NYSE:RMAX), and Crestwood Equity Partners LP (NYSE:CEQP). All of these stocks’ market caps are closest to PRPL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CCF 12 89293 2
ATNI 8 53962 0
REGI 21 83483 5
TMP 4 11436 0
DVAX 17 122509 9
RMAX 7 42453 1
CEQP 4 1435 0
Average 10.4 57796 2.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.4 hedge funds with bullish positions and the average amount invested in these stocks was $58 million. That figure was $359 million in PRPL’s case. Renewable Energy Group Inc (NASDAQ:REGI) is the most popular stock in this table. On the other hand Tompkins Financial Corporation (NYSE:TMP) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Purple Innovation, Inc. (NASDAQ:PRPL) is more popular among hedge funds. Our overall hedge fund sentiment score for PRPL is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 returned 21.3% in 2020 through September 25th but still managed to beat the market by 17.7 percentage points. Hedge funds were also right about betting on PRPL as the stock returned 35.9% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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