There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Pure Cycle Corporation (NASDAQ:PCYO).
Pure Cycle Corporation (NASDAQ:PCYO) investors should be aware of an increase in hedge fund sentiment recently. Our calculations also showed that PCYO isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. Now we're going to analyze the fresh hedge fund action regarding Pure Cycle Corporation (NASDAQ:PCYO).
Hedge fund activity in Pure Cycle Corporation (NASDAQ:PCYO)
Heading into the third quarter of 2019, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PCYO over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, PAR Capital Management was the largest shareholder of Pure Cycle Corporation (NASDAQ:PCYO), with a stake worth $63.4 million reported as of the end of March. Trailing PAR Capital Management was Trigran Investments, which amassed a stake valued at $17.9 million. Royce & Associates, Ariel Investments, and Skylands Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, key hedge funds were leading the bulls' herd. Beddow Capital Management, managed by Ed Beddow and William Tichy, assembled the biggest position in Pure Cycle Corporation (NASDAQ:PCYO). Beddow Capital Management had $0.2 million invested in the company at the end of the quarter.
Let's also examine hedge fund activity in other stocks similar to Pure Cycle Corporation (NASDAQ:PCYO). We will take a look at Landcadia Holdings II, Inc. (NASDAQ:LCAHU), Hooker Furniture Corporation (NASDAQ:HOFT), National Bankshares Inc. (NASDAQ:NKSH), and Ames National Corporation (NASDAQ:ATLO). This group of stocks' market valuations are closest to PCYO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LCAHU,18,107377,18 HOFT,6,39559,-5 NKSH,3,19391,0 ATLO,3,19037,0 Average,7.5,46341,3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.5 hedge funds with bullish positions and the average amount invested in these stocks was $46 million. That figure was $88 million in PCYO's case. Landcadia Holdings II, Inc. (NASDAQ:LCAHU) is the most popular stock in this table. On the other hand National Bankshares Inc. (NASDAQ:NKSH) is the least popular one with only 3 bullish hedge fund positions. Pure Cycle Corporation (NASDAQ:PCYO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately PCYO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PCYO investors were disappointed as the stock returned -3% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.