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 ProPetro Holding Corp. (NYSE:PUMP) and determine whether hedge funds skillfully traded this stock.
ProPetro Holding Corp. (NYSE:PUMP) investors should be aware of a decrease in support from the world's most elite money managers recently. Our calculations also showed that PUMP 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_340081" align="aligncenter" width="392"] Phill Gross of Adage Capital Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 largest silicon producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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 gander at the fresh hedge fund action surrounding ProPetro Holding Corp. (NYSE:PUMP).
What have hedge funds been doing with ProPetro Holding Corp. (NYSE:PUMP)?
At Q1's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -43% from the fourth quarter of 2019. By comparison, 21 hedge funds held shares or bullish call options in PUMP a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
More specifically, Adage Capital Management was the largest shareholder of ProPetro Holding Corp. (NYSE:PUMP), with a stake worth $9.4 million reported as of the end of September. Trailing Adage Capital Management was Citadel Investment Group, which amassed a stake valued at $8 million. Deep Basin Capital, Fisher Asset Management, and AQR Capital Management 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 Anchor Bolt Capital allocated the biggest weight to ProPetro Holding Corp. (NYSE:PUMP), around 2.64% of its 13F portfolio. Deep Basin Capital is also relatively very bullish on the stock, earmarking 1.67 percent of its 13F equity portfolio to PUMP.
Since ProPetro Holding Corp. (NYSE:PUMP) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there was a specific group of money managers who sold off their full holdings in the first quarter. At the top of the heap, Todd J. Kantor's Encompass Capital Advisors dumped the biggest position of all the hedgies tracked by Insider Monkey, worth about $45.2 million in stock. Randall Smith's fund, Alden Global Capital, also dropped its stock, about $4.6 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 10 funds in the first quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as ProPetro Holding Corp. (NYSE:PUMP) but similarly valued. We will take a look at Matrix Service Co (NASDAQ:MTRX), Leju Holdings Ltd (NYSE:LEJU), Corenergy Infrastructure Trust Inc (NYSE:CORR), and NVE Corporation (NASDAQ:NVEC). This group of stocks' market values are closest to PUMP's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MTRX,15,14923,-3 LEJU,1,2398,0 CORR,9,24575,-1 NVEC,9,18225,-1 Average,8.5,15030,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $32 million in PUMP's case. Matrix Service Co (NASDAQ:MTRX) is the most popular stock in this table. On the other hand Leju Holdings Ltd (NYSE:LEJU) is the least popular one with only 1 bullish hedge fund positions. ProPetro Holding Corp. (NYSE:PUMP) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on PUMP as the stock returned 105.6% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.