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 Parsley Energy Inc (NYSE:PE) and determine whether hedge funds skillfully traded this stock.
Parsley Energy Inc (NYSE:PE) investors should be aware of a decrease in activity from the world’s largest hedge funds of late. Parsley Energy Inc (NYSE:PE) was in 39 hedge funds’ portfolios at the end of June. The all time high for this statistics is 52. Our calculations also showed that PE 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to take a look at the key hedge fund action encompassing Parsley Energy Inc (NYSE:PE).
How have hedgies been trading Parsley Energy Inc (NYSE:PE)?
At the end of June, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 36 hedge funds with a bullish position in PE a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the number one position in Parsley Energy Inc (NYSE:PE). Citadel Investment Group has a $65.6 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Citadel Investment Group’s heels is Israel Englander of Millennium Management, with a $48.1 million position; 0.1% of its 13F portfolio is allocated to the company. Other peers with similar optimism include Phill Gross and Robert Atchinson’s Adage Capital Management, Todd J. Kantor’s Encompass Capital Advisors and Vince Maddi and Shawn Brennan’s SIR Capital Management. In terms of the portfolio weights assigned to each position SIR Capital Management allocated the biggest weight to Parsley Energy Inc (NYSE:PE), around 8.47% of its 13F portfolio. Encompass Capital Advisors is also relatively very bullish on the stock, earmarking 5.86 percent of its 13F equity portfolio to PE.
Because Parsley Energy Inc (NYSE:PE) has experienced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of funds that decided to sell off their entire stakes in the second quarter. Interestingly, Jonathan Barrett and Paul Segal’s Luminus Management said goodbye to the largest investment of all the hedgies followed by Insider Monkey, worth close to $15.2 million in stock. Renaissance Technologies, also cut its stock, about $7.6 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 6 funds in the second quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Parsley Energy Inc (NYSE:PE) but similarly valued. We will take a look at Arrowhead Pharmaceuticals Inc. (NASDAQ:ARWR), The Middleby Corporation (NASDAQ:MIDD), NewMarket Corporation (NYSE:NEU), Silicon Laboratories Inc.(NASDAQ:SLAB), Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI), Mercury Systems Inc (NASDAQ:MRCY), and Schneider National, Inc. (NYSE:SNDR). This group of stocks’ market values resemble PE’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 20.3 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $508 million in PE’s case. Silicon Laboratories Inc.(NASDAQ:SLAB) is the most popular stock in this table. On the other hand Sinopec Shanghai Petrochemical Company Limited (NYSE:SHI) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Parsley Energy Inc (NYSE:PE) is more popular among hedge funds. Our overall hedge fund sentiment score for PE is 71.5. 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 gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately PE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PE were disappointed as the stock returned 0.7% since the end of the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
Disclosure: None. This article was originally published at Insider Monkey.