Were Hedge Funds Right About Piling Into PennyMac Financial Services Inc (PFSI)?

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 (see why hell is coming). 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 PennyMac Financial Services Inc (NYSE:PFSI) at the end of the first quarter and determine whether the smart money was really smart about this stock.

PennyMac Financial Services Inc (NYSE:PFSI) was in 24 hedge funds’ portfolios at the end of March. PFSI investors should pay attention to an increase in hedge fund interest lately. There were 16 hedge funds in our database with PFSI holdings at the end of the previous quarter. Our calculations also showed that PFSI 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.

According to most investors, hedge funds are seen as underperforming, outdated financial tools of yesteryear. While there are more than 8000 funds with their doors open today, We choose to focus on the top tier of this group, about 850 funds. These money managers control bulk of all hedge funds’ total asset base, and by keeping an eye on their unrivaled investments, Insider Monkey has determined a number of investment strategies that have historically exceeded Mr. Market. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Ken Heebner of Capital Growth Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now we’re going to take a look at the latest hedge fund action encompassing PennyMac Financial Services Inc (NYSE:PFSI).

How are hedge funds trading PennyMac Financial Services Inc (NYSE:PFSI)?

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 50% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PFSI over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PFSI A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Richard Mashaal’s Rima Senvest Management has the biggest position in PennyMac Financial Services Inc (NYSE:PFSI), worth close to $31.7 million, comprising 3.7% of its total 13F portfolio. On Rima Senvest Management’s heels is Clough Capital Partners, managed by Charles Clough, which holds a $24.5 million position; 2.4% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions comprise Ken Heebner’s Capital Growth Management,  Renaissance Technologies and Paul Reeder and Edward Shapiro’s PAR Capital Management. In terms of the portfolio weights assigned to each position Strycker View Capital allocated the biggest weight to PennyMac Financial Services Inc (NYSE:PFSI), around 18.52% of its 13F portfolio. OCO Capital Partners is also relatively very bullish on the stock, dishing out 7.26 percent of its 13F equity portfolio to PFSI.

Consequently, key hedge funds have jumped into PennyMac Financial Services Inc (NYSE:PFSI) headfirst. Clough Capital Partners, managed by Charles Clough, established the largest position in PennyMac Financial Services Inc (NYSE:PFSI). Clough Capital Partners had $24.5 million invested in the company at the end of the quarter. Ken Heebner’s Capital Growth Management also made a $23.9 million investment in the stock during the quarter. The following funds were also among the new PFSI investors: Usman Waheed’s Strycker View Capital, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Benjamin A. Smith’s Laurion Capital Management.

Let’s now review hedge fund activity in other stocks similar to PennyMac Financial Services Inc (NYSE:PFSI). We will take a look at PJT Partners Inc (NYSE:PJT), Helmerich & Payne, Inc. (NYSE:HP), Hancock Whitney Corporation (NASDAQ:HWC), and Atlantic Union Bankshares Corporation (NASDAQ:AUB). This group of stocks’ market caps are closest to PFSI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PJT 22 88247 2
HP 27 114660 -6
HWC 20 40474 4
AUB 10 14509 2
Average 19.75 64473 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $64 million. That figure was $210 million in PFSI’s case. Helmerich & Payne, Inc. (NYSE:HP) is the most popular stock in this table. On the other hand Atlantic Union Bankshares Corporation (NASDAQ:AUB) is the least popular one with only 10 bullish hedge fund positions. PennyMac Financial Services Inc (NYSE:PFSI) is not the most popular stock in this group but hedge fund interest is still above average. 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 still beat the market by 15.5 percentage points. Hedge funds were also right about betting on PFSI as the stock returned 89.8% in Q2 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.