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Proofpoint Inc (PFPT): Are Hedge Funds Right About Dumping This Stock?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Proofpoint Inc (NASDAQ:PFPT) and determine whether hedge funds had an edge regarding this stock.

Is Proofpoint Inc (NASDAQ:PFPT) a bargain? Prominent investors were in a pessimistic mood. The number of long hedge fund bets decreased by 8 in recent months. Our calculations also showed that PFPT isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

To the average investor there are dozens of signals shareholders use to evaluate their holdings. A couple of the most useful signals are hedge fund and insider trading signals. We have shown that, historically, those who follow the best picks of the elite fund managers can outperform the market by a significant amount (see the details here).

Robert Moses RGM Capital

Robert Moses of RGM Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind let’s take a glance at the new hedge fund action regarding Proofpoint Inc (NASDAQ:PFPT).

How are hedge funds trading Proofpoint Inc (NASDAQ:PFPT)?

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in PFPT over the last 18 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

More specifically, RGM Capital was the largest shareholder of Proofpoint Inc (NASDAQ:PFPT), with a stake worth $81.2 million reported as of the end of September. Trailing RGM Capital was Polar Capital, which amassed a stake valued at $40.8 million. Tremblant Capital, Alyeska Investment Group, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position RGM Capital allocated the biggest weight to Proofpoint Inc (NASDAQ:PFPT), around 6.38% of its 13F portfolio. Crosslink Capital is also relatively very bullish on the stock, setting aside 3.19 percent of its 13F equity portfolio to PFPT.

Because Proofpoint Inc (NASDAQ:PFPT) has experienced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there were a few funds that elected to cut their entire stakes in the first quarter. Intriguingly, Steve Cohen’s Point72 Asset Management said goodbye to the largest investment of all the hedgies watched by Insider Monkey, totaling close to $11.2 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund dropped about $6.8 million worth. These transactions are important to note, as total hedge fund interest was cut by 8 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Proofpoint Inc (NASDAQ:PFPT). These stocks are Generac Holdings Inc. (NYSE:GNRC), Bunge Limited (NYSE:BG), Avalara, Inc. (NYSE:AVLR), and MGM Resorts International (NYSE:MGM). This group of stocks’ market valuations resemble PFPT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GNRC 29 192057 -3
BG 39 543155 2
AVLR 34 970359 -13
MGM 50 943490 0
Average 38 662265 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $662 million. That figure was $316 million in PFPT’s case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand Generac Holdings Inc. (NYSE:GNRC) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks Proofpoint Inc (NASDAQ:PFPT) is even less popular than GNRC. Hedge funds dodged a bullet by taking a bearish stance towards PFPT. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately PFPT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); PFPT investors were disappointed as the stock returned 8.3% during 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 so far in 2020.

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