U.S. Markets close in 3 hrs 26 mins

Should You Buy PICO Holdings Inc (PICO)?

Reymerlyn Martin

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of PICO Holdings Inc (NASDAQ:PICO) and see how the stock is affected by the recent hedge fund activity.

PICO Holdings Inc (NASDAQ:PICO) investors should pay attention to an increase in hedge fund sentiment of late. Our calculations also showed that PICO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_193003" align="aligncenter" width="600"] Chuck Royce of Royce & Associates[/caption]

Chuck Royce

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy  based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's take a peek at the new hedge fund action regarding PICO Holdings Inc (NASDAQ:PICO).

What have hedge funds been doing with PICO Holdings Inc (NASDAQ:PICO)?

Heading into the fourth quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in PICO a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

More specifically, Bandera Partners was the largest shareholder of PICO Holdings Inc (NASDAQ:PICO), with a stake worth $10.6 million reported as of the end of September. Trailing Bandera Partners was Royce & Associates, which amassed a stake valued at $10.1 million. Arrowstreet Capital, D E Shaw, and Ancora 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 Bandera Partners allocated the biggest weight to PICO Holdings Inc (NASDAQ:PICO), around 6.67% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.09 percent of its 13F equity portfolio to PICO.

As one would reasonably expect, key money managers have jumped into PICO Holdings Inc (NASDAQ:PICO) headfirst. Winton Capital Management, managed by David Harding, initiated the largest position in PICO Holdings Inc (NASDAQ:PICO). Winton Capital Management had $0.5 million invested in the company at the end of the quarter. John Overdeck and David Siegel's Two Sigma Advisors also initiated a $0.2 million position during the quarter.

Let's now take a look at hedge fund activity in other stocks similar to PICO Holdings Inc (NASDAQ:PICO). We will take a look at Mallinckrodt Public Limited Company (NYSE:MNK), Smith Micro Software, Inc. (NASDAQ:SMSI), GSI Technology, Inc. (NASDAQ:GSIT), and Arlington Asset Investment Corp (NYSE:AI). This group of stocks' market valuations match PICO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNK,20,34235,0 SMSI,4,3943,2 GSIT,6,17724,2 AI,7,20208,0 Average,9.25,19028,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $19 million. That figure was $28 million in PICO's case. Mallinckrodt Public Limited Company (NYSE:MNK) is the most popular stock in this table. On the other hand Smith Micro Software, Inc. (NASDAQ:SMSI) is the least popular one with only 4 bullish hedge fund positions. PICO Holdings Inc (NASDAQ:PICO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on PICO, though not to the same extent, as the stock returned 8.8% during the first two months of the fourth quarter and outperformed the market as well.

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

Related Content