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Were Hedge Funds Right About PDF Solutions, Inc. (PDFS)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtPDF Solutions, Inc. (NASDAQ:PDFS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

PDF Solutions, Inc. (NASDAQ:PDFS) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 12 hedge funds’ portfolios at the end of March. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Myers Industries, Inc. (NYSE:MYE), Wabash National Corporation (NYSE:WNC), and Intersect ENT Inc (NASDAQ:XENT) to gather more data points. Our calculations also showed that PDFS 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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 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.

Wall Street Bull

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. Keeping this in mind let’s check out the key hedge fund action encompassing PDF Solutions, Inc. (NASDAQ:PDFS).

What does smart money think about PDF Solutions, Inc. (NASDAQ:PDFS)?

At Q1’s end, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PDFS over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in PDF Solutions, Inc. (NASDAQ:PDFS) was held by Royce & Associates, which reported holding $5.9 million worth of stock at the end of September. It was followed by Divisar Capital with a $3.4 million position. Other investors bullish on the company included Marshall Wace LLP, Citadel Investment Group, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Divisar Capital allocated the biggest weight to PDF Solutions, Inc. (NASDAQ:PDFS), around 1.33% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.08 percent of its 13F equity portfolio to PDFS.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Lyon Street Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Renaissance Technologies).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as PDF Solutions, Inc. (NASDAQ:PDFS) but similarly valued. These stocks are Myers Industries, Inc. (NYSE:MYE), Wabash National Corporation (NYSE:WNC), Intersect ENT Inc (NASDAQ:XENT), and The Hackett Group, Inc. (NASDAQ:HCKT). This group of stocks’ market valuations resemble PDFS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MYE 13 71362 0
WNC 16 27269 4
XENT 20 77242 -1
HCKT 18 87972 2
Average 16.75 65961 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $66 million. That figure was $19 million in PDFS’s case. Intersect ENT Inc (NASDAQ:XENT) is the most popular stock in this table. On the other hand Myers Industries, Inc. (NYSE:MYE) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks PDF Solutions, Inc. (NASDAQ:PDFS) is even less popular than MYE. Hedge funds clearly dropped the ball on PDFS as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on PDFS as the stock returned 66.9% in the second quarter and outperformed the market by an even larger margin.

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