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Hedge Funds Got Back Into PagSeguro Digital Ltd. (PAGS) Too Early

Asma UL Husna

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 750 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is PagSeguro Digital Ltd. (NYSE:PAGS), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is PagSeguro Digital Ltd. (NYSE:PAGS) a great investment right now? The smart money is taking a bullish view. The number of long hedge fund positions inched up by 5 recently. Our calculations also showed that PAGS 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

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 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. 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_670980" align="aligncenter" width="600"] Gabriel Plotkin of Melvin Capital Management[/caption]

Gabriel Plotkin Melvin Capital Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's go over the fresh hedge fund action encompassing PagSeguro Digital Ltd. (NYSE:PAGS).

Hedge fund activity in PagSeguro Digital Ltd. (NYSE:PAGS)

At Q3's end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from one quarter earlier. On the other hand, there were a total of 39 hedge funds with a bullish position in PAGS a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

PAGS_dec2019

More specifically, Sylebra Capital Management was the largest shareholder of PagSeguro Digital Ltd. (NYSE:PAGS), with a stake worth $340.9 million reported as of the end of September. Trailing Sylebra Capital Management was Melvin Capital Management, which amassed a stake valued at $247.5 million. Hunt Lane Capital, Samlyn Capital, and Echo Street 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 Hunt Lane Capital allocated the biggest weight to PagSeguro Digital Ltd. (NYSE:PAGS), around 18.45% of its portfolio. Tekne Capital Management is also relatively very bullish on the stock, dishing out 17.44 percent of its 13F equity portfolio to PAGS.

As one would reasonably expect, key money managers have been driving this bullishness. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, established the biggest position in PagSeguro Digital Ltd. (NYSE:PAGS). Polar Capital had $33 million invested in the company at the end of the quarter. Josh Donfeld and David Rogers's Castle Hook Partners also made a $28.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali's Alta Park Capital, and Pasco Alfaro / Richard Tumure's Miura Global Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as PagSeguro Digital Ltd. (NYSE:PAGS) but similarly valued. These stocks are CenterPoint Energy, Inc. (NYSE:CNP), Magellan Midstream Partners, L.P. (NYSE:MMP), Celanese Corporation (NYSE:CE), and CBS Corporation (NYSE:CBS). This group of stocks' market valuations are closest to PAGS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CNP,27,1089888,-2 MMP,12,55553,2 CE,18,944524,-2 CBS,49,1742539,-1 Average,26.5,958126,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $958 million. That figure was $1381 million in PAGS's case. CBS Corporation (NYSE:CBS) is the most popular stock in this table. On the other hand Magellan Midstream Partners, L.P. (NYSE:MMP) is the least popular one with only 12 bullish hedge fund positions. PagSeguro Digital Ltd. (NYSE:PAGS) 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 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. Unfortunately PAGS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PAGS were disappointed as the stock returned -26.7% during the fourth quarter (through the end of November) 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 this year.

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

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