Was The Smart Money Right About Dumping Pioneer Natural Resources Company (PXD)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Pioneer Natural Resources Company (NYSE:PXD).

Is Pioneer Natural Resources Company (NYSE:PXD) undervalued? Investors who are in the know were becoming less confident. The number of bullish hedge fund bets shrunk by 5 lately. Pioneer Natural Resources Company (NYSE:PXD) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 74. Our calculations also showed that PXD 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 40 hedge funds in our database with PXD positions at the end of the first quarter.

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

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 56 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.

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 biggest telecom companies to identify fast growing companies in various industries. 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. Keeping this in mind we’re going to take a look at the latest hedge fund action regarding Pioneer Natural Resources Company (NYSE:PXD).

How are hedge funds trading Pioneer Natural Resources Company (NYSE:PXD)?

At the end of June, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. By comparison, 48 hedge funds held shares or bullish call options in PXD a year ago. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

More specifically, Holocene Advisors was the largest shareholder of Pioneer Natural Resources Company (NYSE:PXD), with a stake worth $44.8 million reported as of the end of June. Trailing Holocene Advisors was Two Sigma Advisors, which amassed a stake valued at $44.8 million. Millennium Management, Renaissance Technologies, and Citadel Investment Group 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 Covalis Capital allocated the biggest weight to Pioneer Natural Resources Company (NYSE:PXD), around 3.11% of its 13F portfolio. Arosa Capital Management is also relatively very bullish on the stock, dishing out 3.04 percent of its 13F equity portfolio to PXD.

Since Pioneer Natural Resources Company (NYSE:PXD) has faced falling interest from the smart money, logic holds that there was a specific group of hedgies who were dropping their positions entirely in the second quarter. Interestingly, Todd J. Kantor’s Encompass Capital Advisors said goodbye to the largest investment of the 750 funds monitored by Insider Monkey, comprising an estimated $86.1 million in stock. Gavin M. Abrams’s fund, Abrams Bison Investments, also dumped its stock, about $32.1 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 5 funds in the second quarter.

Let’s also examine hedge fund activity in other stocks similar to Pioneer Natural Resources Company (NYSE:PXD). We will take a look at Bilibili Inc. (NASDAQ:BILI), Hess Corporation (NYSE:HES), Take-Two Interactive Software, Inc. (NASDAQ:TTWO), Arista Networks Inc (NYSE:ANET), Baker Hughes Company (NYSE:BKR), Agnico Eagle Mines Limited (NYSE:AEM), and ORIX Corporation (NYSE:IX). All of these stocks’ market caps match PXD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.3 hedge funds with bullish positions and the average amount invested in these stocks was $662 million. That figure was $341 million in PXD’s case. Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is the most popular stock in this table. On the other hand ORIX Corporation (NYSE:IX) is the least popular one with only 4 bullish hedge fund positions. Pioneer Natural Resources Company (NYSE:PXD) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PXD is 41.4. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 beat the market again by 20.1 percentage points. Unfortunately PXD wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PXD were disappointed as the stock returned -18.1% since the end of June (through 10/30) 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 many of these stocks already outperformed the market so far this year.

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