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Were Hedge Funds Right About Jumping Into Pool Corporation (POOL)?

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves.

Pool Corporation (NASDAQ:POOL) has experienced an increase in activity from the world’s largest hedge funds lately. Our calculations also showed that POOL isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

POOL_oct2019

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a look at the fresh hedge fund action surrounding Pool Corporation (NASDAQ:POOL).

How are hedge funds trading Pool Corporation (NASDAQ:POOL)?

At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards POOL over the last 16 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

CHILTON INVESTMENT COMPANY

More specifically, Fisher Asset Management was the largest shareholder of Pool Corporation (NASDAQ:POOL), with a stake worth $97.3 million reported as of the end of March. Trailing Fisher Asset Management was Impax Asset Management, which amassed a stake valued at $76.6 million. GLG Partners, Chilton Investment Company, and Royce & Associates were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, specific money managers were breaking ground themselves. Chilton Investment Company, managed by Richard Chilton, initiated the biggest position in Pool Corporation (NASDAQ:POOL). Chilton Investment Company had $26.7 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $5.9 million position during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors, and D. E. Shaw’s D E Shaw.

Let’s also examine hedge fund activity in other stocks similar to Pool Corporation (NASDAQ:POOL). We will take a look at Apartment Investment and Management Co. (NYSE:AIV), Liberty Property Trust (NYSE:LPT), Etsy Inc (NASDAQ:ETSY), and Guardant Health, Inc. (NASDAQ:GH). All of these stocks’ market caps are closest to POOL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AIV 24 701466 3
LPT 19 337910 0
ETSY 41 1228455 2
GH 19 225721 5
Average 25.75 623388 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $623 million. That figure was $342 million in POOL’s case. Etsy Inc (NASDAQ:ETSY) is the most popular stock in this table. On the other hand Liberty Property Trust (NYSE:LPT) is the least popular one with only 19 bullish hedge fund positions. Pool Corporation (NASDAQ:POOL) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on POOL as the stock returned 5.9% during the same time frame and outperformed the market by an even larger margin.

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

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