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Were Hedge Funds Right About Souring On PCSB Financial Corporation (PCSB)?

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 PCSB Financial Corporation (NASDAQ:PCSB) at the end of the first quarter and determine whether the smart money was really smart about this stock.

PCSB Financial Corporation (NASDAQ:PCSB) was in 10 hedge funds’ portfolios at the end of the first quarter of 2020. PCSB has seen a decrease in hedge fund interest of late. There were 11 hedge funds in our database with PCSB positions at the end of the previous quarter. Our calculations also showed that PCSB 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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. Now let’s analyze the latest hedge fund action surrounding PCSB Financial Corporation (NASDAQ:PCSB).

How are hedge funds trading PCSB Financial Corporation (NASDAQ:PCSB)?

Heading into the second quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 9 hedge funds with a bullish position in PCSB a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of PCSB Financial Corporation (NASDAQ:PCSB), with a stake worth $6.5 million reported as of the end of September. Trailing Renaissance Technologies was Prospector Partners, which amassed a stake valued at $3.5 million. Royce & Associates, Millennium Management, and Two Sigma Advisors 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 Prospector Partners allocated the biggest weight to PCSB Financial Corporation (NASDAQ:PCSB), around 0.66% of its 13F portfolio. Ancora Advisors is also relatively very bullish on the stock, setting aside 0.04 percent of its 13F equity portfolio to PCSB.

Since PCSB Financial Corporation (NASDAQ:PCSB) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of hedge funds who sold off their full holdings heading into Q4. It’s worth mentioning that Paul Magidson, Jonathan Cohen. And Ostrom Enders’s Castine Capital Management sold off the largest investment of the “upper crust” of funds tracked by Insider Monkey, totaling about $6.9 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dropped its stock, about $0.8 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 1 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as PCSB Financial Corporation (NASDAQ:PCSB) but similarly valued. These stocks are The Michaels Companies, Inc. (NASDAQ:MIK), HEXO Corp. (NYSE:HEXO), Territorial Bancorp Inc (NASDAQ:TBNK), and Motorcar Parts of America, Inc. (NASDAQ:MPAA). This group of stocks’ market caps match PCSB’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MIK 22 32826 -4
HEXO 7 720 1
TBNK 4 20232 0
MPAA 6 44768 1
Average 9.75 24637 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.75 hedge funds with bullish positions and the average amount invested in these stocks was $25 million. That figure was $18 million in PCSB’s case. The Michaels Companies, Inc. (NASDAQ:MIK) is the most popular stock in this table. On the other hand Territorial Bancorp Inc (NASDAQ:TBNK) is the least popular one with only 4 bullish hedge fund positions. PCSB Financial Corporation (NASDAQ:PCSB) 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 PCSB wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on PCSB were disappointed as the stock returned -9.1% 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.