Was The Smart Money Right About Crowding Into Penn National Gaming, Inc (PENN)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Penn National Gaming, Inc (NASDAQ:PENN).

Is Penn National Gaming, Inc (NASDAQ:PENN) undervalued? Hedge funds were in an optimistic mood. The number of bullish hedge fund positions improved by 16 in recent months. Penn National Gaming, Inc (NASDAQ:PENN) was in 34 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 35. Our calculations also showed that PENN 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). There were 18 hedge funds in our database with PENN positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

DUQUESNE CAPITAL

Stanley Druckenmiller of Duquesne Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s take a look at the recent hedge fund action encompassing Penn National Gaming, Inc (NASDAQ:PENN).

What does smart money think about Penn National Gaming, Inc (NASDAQ:PENN)?

At the end of the second quarter, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 89% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in PENN over the last 20 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in Penn National Gaming, Inc (NASDAQ:PENN) was held by Arrowstreet Capital, which reported holding $76.4 million worth of stock at the end of June. It was followed by Jericho Capital Asset Management with a $68.7 million position. Other investors bullish on the company included ThornTree Capital Partners, Citadel Investment Group, and Duquesne Capital. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to Penn National Gaming, Inc (NASDAQ:PENN), around 6.24% of its 13F portfolio. Chiron Investment Management is also relatively very bullish on the stock, dishing out 3.36 percent of its 13F equity portfolio to PENN.

As one would reasonably expect, key money managers were leading the bulls’ herd. Jericho Capital Asset Management, managed by Josh Resnick, initiated the most valuable position in Penn National Gaming, Inc (NASDAQ:PENN). Jericho Capital Asset Management had $68.7 million invested in the company at the end of the quarter. Mark Moore’s ThornTree Capital Partners also initiated a $39.5 million position during the quarter. The other funds with new positions in the stock are Stanley Druckenmiller’s Duquesne Capital, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now take a look at hedge fund activity in other stocks similar to Penn National Gaming, Inc (NASDAQ:PENN). We will take a look at Emergent Biosolutions Inc (NYSE:EBS), Littelfuse, Inc. (NASDAQ:LFUS), MorphoSys AG (NASDAQ:MOR), LogMeIn Inc (NASDAQ:LOGM), Redfin Corporation (NASDAQ:RDFN), New Relic Inc (NYSE:NEWR), and Nektar Therapeutics (NASDAQ:NKTR). All of these stocks’ market caps are similar to PENN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EBS 21 119854 4
LFUS 24 316882 2
MOR 6 12533 1
LOGM 31 785090 3
RDFN 26 203341 6
NEWR 35 1206690 4
NKTR 26 269126 9
Average 24.1 416217 4.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.1 hedge funds with bullish positions and the average amount invested in these stocks was $416 million. That figure was $429 million in PENN’s case. New Relic Inc (NYSE:NEWR) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 6 bullish hedge fund positions. Penn National Gaming, Inc (NASDAQ:PENN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PENN is 87.4. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on PENN as the stock returned 76.8% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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