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Hedge Funds Have Never Been This Bullish On Pure Storage, Inc. (PSTG)

Reymerlyn Martin

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Pure Storage, Inc. (NYSE:PSTG).

Is Pure Storage, Inc. (NYSE:PSTG) a healthy stock for your portfolio? The best stock pickers are betting on the stock. The number of long hedge fund bets rose by 9 recently. Our calculations also showed that PSTG 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

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 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.

[caption id="attachment_339739" align="aligncenter" width="600"] Ricky Sandler of Eminence Capital[/caption]

Ricky Sandler of Eminence Capital

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. We're going to take a look at the recent hedge fund action surrounding Pure Storage, Inc. (NYSE:PSTG).

What does smart money think about Pure Storage, Inc. (NYSE:PSTG)?

At Q3's end, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 39% from one quarter earlier. On the other hand, there were a total of 31 hedge funds with a bullish position in PSTG a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

PSTG_dec2019

Among these funds, Eminence Capital held the most valuable stake in Pure Storage, Inc. (NYSE:PSTG), which was worth $140.1 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $126.7 million worth of shares. Renaissance Technologies, Okumus Fund Management, 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 Okumus Fund Management allocated the biggest weight to Pure Storage, Inc. (NYSE:PSTG), around 13.32% of its portfolio. Lucha Capital Management is also relatively very bullish on the stock, designating 6.32 percent of its 13F equity portfolio to PSTG.

With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the most outsized position in Pure Storage, Inc. (NYSE:PSTG). Balyasny Asset Management had $31.3 million invested in the company at the end of the quarter. Marcelo Desio's Lucha Capital Management also made a $20.7 million investment in the stock during the quarter. The other funds with brand new PSTG positions are Brandon Haley's Holocene Advisors, James Crichton's Hitchwood Capital Management, and John Brennan's Sirios Capital Management.

Let's now take a look at hedge fund activity in other stocks similar to Pure Storage, Inc. (NYSE:PSTG). These stocks are Graphic Packaging Holding Company (NYSE:GPK), Healthcare Realty Trust Inc (NYSE:HR), Webster Financial Corporation (NYSE:WBS), and Telecom Argentina S.A. (NYSE:TEO). This group of stocks' market caps are similar to PSTG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GPK,33,500405,3 HR,12,44639,3 WBS,22,337629,0 TEO,4,29115,1 Average,17.75,227947,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $228 million. That figure was $691 million in PSTG's case. Graphic Packaging Holding Company (NYSE:GPK) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 4 bullish hedge fund positions. Pure Storage, Inc. (NYSE:PSTG) 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 PSTG wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PSTG were disappointed as the stock returned -5.1% 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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