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Were Hedge Funds Right About Piling Into Perspecta Inc. (PRSP)?

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 Perspecta Inc. (NYSE:PRSP) and determine whether hedge funds skillfully traded this stock.

Is Perspecta Inc. (NYSE:PRSP) a bargain? Money managers were reducing their bets on the stock. The number of long hedge fund bets were trimmed by 14 in recent months. Our calculations also showed that PRSP 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). PRSP was in 32 hedge funds’ portfolios at the end of the first quarter of 2020. There were 46 hedge funds in our database with PRSP positions at the end of the previous quarter.

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

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ryan Frick Dorsal Capital

Ryan Frick of Dorsal Capital

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 take a look at the key hedge fund action encompassing Perspecta Inc. (NYSE:PRSP).

Hedge fund activity in Perspecta Inc. (NYSE:PRSP)

At the end of the first quarter, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from the fourth quarter of 2019. On the other hand, there were a total of 34 hedge funds with a bullish position in PRSP a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Perspecta Inc. (NYSE:PRSP) was held by Maverick Capital, which reported holding $72.5 million worth of stock at the end of September. It was followed by Crescent Park Management with a $31 million position. Other investors bullish on the company included D E Shaw, Samlyn Capital, and Dorsal Capital Management. In terms of the portfolio weights assigned to each position Crescent Park Management allocated the biggest weight to Perspecta Inc. (NYSE:PRSP), around 7.54% of its 13F portfolio. ACK Asset Management is also relatively very bullish on the stock, earmarking 4.36 percent of its 13F equity portfolio to PRSP.

Judging by the fact that Perspecta Inc. (NYSE:PRSP) has witnessed falling interest from the smart money, logic holds that there were a few funds who sold off their entire stakes by the end of the first quarter. Interestingly, Michael Doheny’s Freshford Capital Management cut the biggest stake of the “upper crust” of funds watched by Insider Monkey, comprising about $21.2 million in stock. Israel Englander’s fund, Millennium Management, also dumped its stock, about $15.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 14 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Perspecta Inc. (NYSE:PRSP). We will take a look at Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI), Iridium Communications Inc. (NASDAQ:IRDM), Advanced Disposal Services, Inc. (NYSE:ADSW), and KBR, Inc. (NYSE:KBR). All of these stocks’ market caps resemble PRSP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OLLI 19 96475 -9
IRDM 20 228723 0
ADSW 21 739563 -1
KBR 28 424712 -1
Average 22 372368 -2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $372 million. That figure was $327 million in PRSP’s case. KBR, Inc. (NYSE:KBR) is the most popular stock in this table. On the other hand Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Perspecta Inc. (NYSE:PRSP) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PRSP as the stock returned 27.7% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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