Hedge Funds Were 600% Overweight This Stock Right Before The Merger Announcement

Out of thousands of stocks that are currently traded on the market, it is difficult to determine those that can really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of over 700 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has potential to beat the market over the long-term. Our analysis showed that hedge funds were 600% overweight Imperva Inc (NYSE:IMPV) at the end of September.

Collectively hedge funds tracked by Insider Monkey owned nearly 30% of Imperva’s outstanding shares right before the company announced that Thoma Bravo agreed to acquire the company for $55.75 per share in cash in early October. The stock jumped to $55 from $46 at the end of September.

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 17.4% year to date and outperformed the market by more than 14 percentage points this year. This strategy also outperformed the market by 3 percentage points in the fourth quarter despite the market volatility (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ricky Sandler, Eminence Capital

How have hedgies been trading Imperva Inc (NYSE:IMPV)?

Heading into the fourth quarter of 2018, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock. The graph below displays the number of hedge funds with bullish position in IMPV over the last 13 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).


The largest stake in Imperva Inc (NYSE:IMPV) was held by Eminence Capital, which reported holding $146 million worth of stock at the end of September. It was followed by RGM Capital with a $92 million position. Other investors bullish on the company included Renaissance Technologies, Elliott Management, and Alyeska Investment Group.

Unfortunately some hedge funds sold out of the stock right before the jump. Richard Barrera’s Roystone Capital Partners said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, comprising close to $11.3 million in stock, and Kenneth Squire’s 13D Management was right behind this move, as the fund dropped about $10.6 million worth.

Let’s now review hedge fund activity in other stocks similar to Imperva Inc (NYSE:IMPV). We will take a look at LivePerson, Inc. (NASDAQ:LPSN), Meritage Homes Corp (NYSE:MTH), Papa John’s Int’l, Inc. (NASDAQ:PZZA), and PPDAI Group Inc. (NYSE:PPDF). All of these stocks’ market caps match IMPV’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LPSN 12 128677 -5
MTH 13 223910 -3
PZZA 27 358846 8
PPDF 5 7735 0

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $479 million in IMPV’s case. Papa John’s Int’l, Inc. (NASDAQ:PZZA) is the most popular stock in this table. On the other hand PPDAI Group Inc. (NYSE:PPDF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Imperva Inc (NYSE:IMPV) is the most popular stock.

By the way, hedge funds were 440% overweight on Papa John’s Int’l, Inc. (NASDAQ:PZZA) due to expected bid by Trian Partners. Overall, though, hedge funds were more overweight IMPV and they were rewarded handsomely in a market environment where 40% of the S&P 500 constituents went into a bear market. Insider Monkey’s quarterly newsletter publishes the list of stocks hedge funds are extremely overweight at the end of September.

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