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Did Hedge Funds Make The Right Call On Petmed Express Inc (PETS)?

Debasis Saha

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 Petmed Express Inc (NASDAQ:PETS) and determine whether hedge funds skillfully traded this stock.

Petmed Express Inc (NASDAQ:PETS) was in 18 hedge funds' portfolios at the end of March. PETS shareholders have witnessed a decrease in support from the world's most elite money managers lately. There were 19 hedge funds in our database with PETS positions at the end of the previous quarter. Our calculations also showed that PETS 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.

GOTHAM ASSET MANAGEMENT
GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let's take a peek at the new hedge fund action regarding Petmed Express Inc (NASDAQ:PETS).

How are hedge funds trading Petmed Express Inc (NASDAQ:PETS)?

Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PETS over the last 18 quarters. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Is PETS A Good Stock To Buy?
Is PETS A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of Petmed Express Inc (NASDAQ:PETS), with a stake worth $46.5 million reported as of the end of September. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $17.4 million. GLG Partners, Newtyn Management, and D E Shaw 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 Newtyn Management allocated the biggest weight to Petmed Express Inc (NASDAQ:PETS), around 2.26% of its 13F portfolio. Ellington is also relatively very bullish on the stock, designating 0.5 percent of its 13F equity portfolio to PETS.

Because Petmed Express Inc (NASDAQ:PETS) has experienced declining sentiment from hedge fund managers, it's safe to say that there was a specific group of fund managers who were dropping their positions entirely by the end of the first quarter. It's worth mentioning that Daniel S. Och's OZ Management said goodbye to the largest stake of the "upper crust" of funds followed by Insider Monkey, worth an estimated $2.2 million in stock, and Philippe Laffont's Coatue Management was right behind this move, as the fund dropped about $1.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds by the end of the first quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Petmed Express Inc (NASDAQ:PETS) but similarly valued. We will take a look at Redwood Trust, Inc. (NYSE:RWT), Greenbrier Companies Inc (NYSE:GBX), TechTarget Inc (NASDAQ:TTGT), and Owens & Minor, Inc. (NYSE:OMI). This group of stocks' market valuations resemble PETS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RWT,22,66955,9 GBX,8,13726,-4 TTGT,14,60057,-2 OMI,16,70459,5 Average,15,52799,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $113 million in PETS's case. Redwood Trust, Inc. (NYSE:RWT) is the most popular stock in this table. On the other hand Greenbrier Companies Inc (NYSE:GBX) is the least popular one with only 8 bullish hedge fund positions. Petmed Express Inc (NASDAQ:PETS) 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately PETS wasn't nearly as popular as these 10 stocks and hedge funds that were betting on PETS were disappointed as the stock returned 9.2% 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.

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