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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Pegasystems Inc. (NASDAQ:PEGA)? The smart money sentiment can provide an answer to this question.
Pegasystems Inc. (NASDAQ:PEGA) was in 35 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic was previously 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. PEGA investors should be aware of an increase in support from the world's most elite money managers lately. There were 32 hedge funds in our database with PEGA positions at the end of the fourth quarter. Our calculations also showed that PEGA isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).
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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
Christian Leone of Luxor Capital Group
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let's take a peek at the fresh hedge fund action regarding Pegasystems Inc. (NASDAQ:PEGA).
Do Hedge Funds Think PEGA Is A Good Stock To Buy Now?
At Q1's end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PEGA over the last 23 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Pegasystems Inc. (NASDAQ:PEGA) was held by Bares Capital Management, which reported holding $588.2 million worth of stock at the end of December. It was followed by Luxor Capital Group with a $451.7 million position. Other investors bullish on the company included Praesidium Investment Management Company, Foxhaven Asset Management, and Eminence Capital. In terms of the portfolio weights assigned to each position Bares Capital Management allocated the biggest weight to Pegasystems Inc. (NASDAQ:PEGA), around 11% of its 13F portfolio. Praesidium Investment Management Company is also relatively very bullish on the stock, earmarking 9.51 percent of its 13F equity portfolio to PEGA.
Consequently, key money managers have been driving this bullishness. Luxor Capital Group, managed by Christian Leone, created the largest call position in Pegasystems Inc. (NASDAQ:PEGA). Luxor Capital Group had $11.4 million invested in the company at the end of the quarter. Thomas Ellis and Todd Hammer's North Run Capital also made a $8.9 million investment in the stock during the quarter. The following funds were also among the new PEGA investors: Dmitry Balyasny's Balyasny Asset Management, Christopher Hillary's Roubaix Capital, and Alec Litowitz and Ross Laser's Magnetar Capital.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Pegasystems Inc. (NASDAQ:PEGA) but similarly valued. These stocks are Companhia Siderurgica Nacional (NYSE:SID), WEX Inc (NYSE:WEX), NRG Energy Inc (NYSE:NRG), Under Armour Inc (NYSE:UA), The Middleby Corporation (NASDAQ:MIDD), Amdocs Limited (NASDAQ:DOX), and CRISPR Therapeutics AG (NASDAQ:CRSP). This group of stocks' market values are similar to PEGA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SID,10,60938,1 WEX,26,538269,0 NRG,35,1606143,4 UA,51,1910459,4 MIDD,28,520500,-2 DOX,32,716631,12 CRSP,27,1407504,-7 Average,29.9,965778,1.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $966 million. That figure was $1728 million in PEGA's case. Under Armour Inc (NYSE:UA) is the most popular stock in this table. On the other hand Companhia Siderurgica Nacional (NYSE:SID) is the least popular one with only 10 bullish hedge fund positions. Pegasystems Inc. (NASDAQ:PEGA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PEGA is 68.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 19.3% in 2021 through June 25th and still beat the market by 4.8 percentage points. Hedge funds were also right about betting on PEGA as the stock returned 22.8% since the end of Q1 (through 6/25) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.