Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds.
Proofpoint Inc (NASDAQ:PFPT) has seen an increase in hedge fund interest of late. PFPT was in 36 hedge funds' portfolios at the end of the second quarter of 2019. There were 33 hedge funds in our database with PFPT positions at the end of the previous quarter. Our calculations also showed that PFPT isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a peek at the new hedge fund action surrounding Proofpoint Inc (NASDAQ:PFPT).
Hedge fund activity in Proofpoint Inc (NASDAQ:PFPT)
Heading into the third quarter of 2019, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the first quarter of 2019. By comparison, 29 hedge funds held shares or bullish call options in PFPT a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Among these funds, Alkeon Capital Management held the most valuable stake in Proofpoint Inc (NASDAQ:PFPT), which was worth $95.2 million at the end of the second quarter. On the second spot was Tremblant Capital which amassed $61.8 million worth of shares. Moreover, RGM Capital, Renaissance Technologies, and Polar Capital were also bullish on Proofpoint Inc (NASDAQ:PFPT), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, key hedge funds were leading the bulls' herd. Adage Capital Management, managed by Phill Gross and Robert Atchinson, assembled the biggest position in Proofpoint Inc (NASDAQ:PFPT). Adage Capital Management had $12 million invested in the company at the end of the quarter. Mark N. Diker's Diker Management also initiated a $8.8 million position during the quarter. The other funds with brand new PFPT positions are Zachary Miller's Parian Global Management, Benjamin A. Smith's Laurion Capital Management, and Michael Kharitonov and Jon David McAuliffe's Voleon Capital.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Proofpoint Inc (NASDAQ:PFPT) but similarly valued. These stocks are Columbia Sportswear Company (NASDAQ:COLM), LPL Financial Holdings Inc (NASDAQ:LPLA), WABCO Holdings Inc. (NYSE:WBC), and Royal Gold, Inc (NASDAQ:RGLD). This group of stocks' market values are closest to PFPT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COLM,27,282676,-5 LPLA,31,1017283,-2 WBC,33,1345936,-3 RGLD,19,68231,2 Average,27.5,678532,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $679 million. That figure was $567 million in PFPT's case. WABCO Holdings Inc. (NYSE:WBC) is the most popular stock in this table. On the other hand Royal Gold, Inc (NASDAQ:RGLD) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Proofpoint Inc (NASDAQ:PFPT) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on PFPT as the stock returned 7.3% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.