How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Principal Financial Group Inc (NASDAQ:PFG) and determine whether hedge funds had an edge regarding this stock.
Principal Financial Group Inc (NNASDAQ:PFG) was in 31 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. PFG has seen an increase in hedge fund interest in recent months. There were 27 hedge funds in our database with PFG holdings at the end of March. Our calculations also showed that PFG isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Dmitry Balyasny of Balyasny Asset Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. With all of this in mind let's take a glance at the latest hedge fund action surrounding Principal Financial Group Inc (NASDAQ:PFG).
What have hedge funds been doing with Principal Financial Group Inc (NASDAQ:PFG)?
At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from the previous quarter. On the other hand, there were a total of 17 hedge funds with a bullish position in PFG a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
Among these funds, Arrowstreet Capital held the most valuable stake in Principal Financial Group Inc (NASDAQ:PFG), which was worth $41.3 million at the end of the third quarter. On the second spot was Balyasny Asset Management which amassed $29.9 million worth of shares. Prana Capital Management, Citadel Investment Group, 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 Prana Capital Management allocated the biggest weight to Principal Financial Group Inc (NASDAQ:PFG), around 2.97% of its 13F portfolio. Arjuna Capital is also relatively very bullish on the stock, earmarking 1.44 percent of its 13F equity portfolio to PFG.
As industrywide interest jumped, specific money managers have been driving this bullishness. Alyeska Investment Group, managed by Anand Parekh, created the largest position in Principal Financial Group Inc (NASDAQ:PFG). Alyeska Investment Group had $4 million invested in the company at the end of the quarter. Farnum Brown and Adam Seitchik's Arjuna Capital also initiated a $2.1 million position during the quarter. The other funds with new positions in the stock are Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, Greg Poole's Echo Street Capital Management, and Karim Abbadi and Edward McBride's Centiva Capital.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Principal Financial Group Inc (NASDAQ:PFG) but similarly valued. These stocks are Neurocrine Biosciences, Inc. (NASDAQ:NBIX), Waters Corporation (NYSE:WAT), Varian Medical Systems, Inc. (NYSE:VAR), Ubiquiti Inc. (NYSE:UI), SVB Financial Group (NASDAQ:SIVB), Jacobs Engineering Group Inc. (NYSE:J), and UDR, Inc. (NYSE:UDR). This group of stocks' market caps match PFG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NBIX,38,1195826,0 WAT,38,615214,13 VAR,27,586063,2 UI,29,227931,6 SIVB,26,456322,-4 J,32,1047013,4 UDR,29,389036,10 Average,31.3,645344,4.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.3 hedge funds with bullish positions and the average amount invested in these stocks was $645 million. That figure was $188 million in PFG's case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand SVB Financial Group (NASDAQ:SIVB) is the least popular one with only 26 bullish hedge fund positions. Principal Financial Group Inc (NASDAQ:PFG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PFG is 59.8. 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. 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 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 23.8% in 2020 through September 14th and surpassed the market by 17.6 percentage points. Unfortunately PFG wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); PFG investors were disappointed as the stock returned 0.7% since Q2 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.