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Were Hedge Funds Right About Dumping Provident Financial Services, Inc. (PFS)?

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 Provident Financial Services, Inc. (NYSE:PFS) and determine whether hedge funds skillfully traded this stock.

Provident Financial Services, Inc. (NYSE:PFS) was in 12 hedge funds’ portfolios at the end of March. PFS shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 16 hedge funds in our database with PFS holdings at the end of the previous quarter. Our calculations also showed that PFS 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

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. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to review the fresh hedge fund action surrounding Provident Financial Services, Inc. (NYSE:PFS).

How are hedge funds trading Provident Financial Services, Inc. (NYSE:PFS)?

Heading into the second quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. On the other hand, there were a total of 6 hedge funds with a bullish position in PFS a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Provident Financial Services, Inc. (NYSE:PFS), which was worth $16.2 million at the end of the third quarter. On the second spot was Millennium Management which amassed $4.4 million worth of shares. Winton Capital Management, Two Sigma Advisors, and D E Shaw 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 Caxton Associates LP allocated the biggest weight to Provident Financial Services, Inc. (NYSE:PFS), around 0.06% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, setting aside 0.04 percent of its 13F equity portfolio to PFS.

Seeing as Provident Financial Services, Inc. (NYSE:PFS) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of money managers who sold off their positions entirely heading into Q4. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP dumped the largest investment of the 750 funds tracked by Insider Monkey, comprising about $1.8 million in stock, and Minhua Zhang’s Weld Capital Management was right behind this move, as the fund cut about $1.3 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Provident Financial Services, Inc. (NYSE:PFS). These stocks are Virtusa Corporation (NASDAQ:VRTU), PBF Energy Inc (NYSE:PBF), DCP Midstream LP (NYSE:DCP), and Cango Inc. (NYSE:CANG). This group of stocks’ market valuations are similar to PFS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VRTU 13 35689 -1
PBF 22 70769 -10
DCP 4 7421 -2
CANG 1 212 0
Average 10 28523 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $29 million. That figure was $26 million in PFS’s case. PBF Energy Inc (NYSE:PBF) is the most popular stock in this table. On the other hand Cango Inc. (NYSE:CANG) is the least popular one with only 1 bullish hedge fund positions. Provident Financial Services, Inc. (NYSE:PFS) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately PFS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PFS were disappointed as the stock returned 14.6% during the same time period 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.

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