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 (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 835 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Pegasystems Inc. (NASDAQ:PEGA) in this article.
Pegasystems Inc. (NASDAQ:PEGA) was in 25 hedge funds’ portfolios at the end of the fourth quarter of 2019. PEGA shareholders have witnessed a decrease in hedge fund sentiment in recent months. There were 26 hedge funds in our database with PEGA positions at the end of the previous quarter. Our calculations also showed that PEGA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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.
Ryan Frick of Dorsal Capital
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. Now let’s review the fresh hedge fund action surrounding Pegasystems Inc. (NASDAQ:PEGA).
Hedge fund activity in Pegasystems Inc. (NASDAQ:PEGA)
At Q4’s end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PEGA over the last 18 quarters. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Brian Bares’s Bares Capital Management has the largest position in Pegasystems Inc. (NASDAQ:PEGA), worth close to $284.9 million, amounting to 8% of its total 13F portfolio. The second most bullish fund manager is Christian Leone of Luxor Capital Group, with a $258.4 million position; 6.8% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish comprise Amish Mehta’s SQN Investors, Ryan Frick and Oliver Evans’s Dorsal Capital Management and Ken Fisher’s Fisher Asset Management. In terms of the portfolio weights assigned to each position SQN Investors allocated the biggest weight to Pegasystems Inc. (NASDAQ:PEGA), around 11.88% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, setting aside 11.46 percent of its 13F equity portfolio to PEGA.
Due to the fact that Pegasystems Inc. (NASDAQ:PEGA) has experienced falling interest from hedge fund managers, we can see that there exists a select few fund managers who sold off their entire stakes in the third quarter. Intriguingly, Leon Shaulov’s Maplelane Capital dumped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $2.7 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund dropped about $0.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Pegasystems Inc. (NASDAQ:PEGA) but similarly valued. We will take a look at Generac Holdings Inc. (NYSE:GNRC), IAA, Inc. (NYSE:IAA), Berry Global Group Inc (NYSE:BERY), and United Microelectronics Corp (NYSE:UMC). This group of stocks’ market values match PEGA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GNRC | 32 | 369028 | -1 |
| IAA | 37 | 1058182 | 5 |
| BERY | 47 | 1623514 | 4 |
| UMC | 14 | 124868 | 1 |
| Average | 32.5 | 793898 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $794 million. That figure was $1051 million in PEGA’s case. Berry Global Group Inc (NYSE:BERY) is the most popular stock in this table. On the other hand United Microelectronics Corp (NYSE:UMC) is the least popular one with only 14 bullish hedge fund positions. Pegasystems Inc. (NASDAQ:PEGA) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds 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 still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on PEGA as the stock returned -20.9% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
