The elite funds run by legendary investors such as Dan Loeb and David Tepper make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentive to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Proofpoint Inc (NASDAQ:PFPT) from the perspective of those elite funds.
Is Proofpoint Inc (NASDAQ:PFPT) ready to rally soon? Hedge funds are in a bearish mood. The number of bullish hedge fund positions retreated by 4 recently. Our calculations also showed that PFPT isn’t among the 30 most popular stocks among hedge funds. PFPT was in 25 hedge funds’ portfolios at the end of September. There were 29 hedge funds in our database with PFPT positions at the end of the previous quarter.
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 the 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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
We’re going to take a look at the new hedge fund action encompassing Proofpoint Inc (NASDAQ:PFPT).
What does the smart money think about Proofpoint Inc (NASDAQ:PFPT)?
At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the second quarter of 2018. By comparison, 20 hedge funds held shares or bullish call options in PFPT heading into this year. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
Among these funds, Alyeska Investment Group held the most valuable stake in Proofpoint Inc (NASDAQ:PFPT), which was worth $74.1 million at the end of the third quarter. On the second spot was Millennium Management, which amassed $64.2 million worth of shares. Moreover, Two Sigma Advisors, Balyasny Asset Management, and Citadel Investment Group were also bullish on Proofpoint Inc (NASDAQ:PFPT), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Proofpoint Inc (NASDAQ:PFPT) has witnessed bearish sentiment from the entirety of the hedge funds we track, we can see that there exists a select few hedgies who sold off their entire stakes in the third quarter. It’s worth mentioning that Glenn Russell Dubin’s Highbridge Capital Management dumped the largest investment of all the hedgies watched by Insider Monkey, totaling an estimated $35.7 million in stock. Alex Sacerdote’s fund, Whale Rock Capital Management, also sold off its stock, about $30.1 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 4 funds in the third quarter.
Let’s go over hedge fund activity in other stocks similar to Proofpoint Inc (NASDAQ:PFPT). We will take a look at Grand Canyon Education Inc (NASDAQ:LOPE), Medical Properties Trust, Inc. (NYSE:MPW), National Beverage Corp. (NASDAQ:FIZZ), and Webster Financial Corporation (NYSE:WBS). All of these stocks’ market caps are similar to PFPT’s market cap.
|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 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $290 million. That figure was $422 million in PFPT’s case. Webster Financial Corporation (NYSE:WBS) is the most popular stock in this table. On the other hand Medical Properties Trust, Inc. (NYSE:MPW) is the least popular one with only 10 bullish hedge fund positions. Proofpoint Inc (NASDAQ:PFPT) 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. In this regard WBS might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.