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Hedge Funds Are Selling PacWest Bancorp (PACW)

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Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks initially suffered the most but many of these stocks delivered strong returns since November and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment towards PacWest Bancorp (NASDAQ:PACW) changed recently.

Is PacWest Bancorp (NASDAQ:PACW) a first-rate investment now? The smart money was in a bearish mood. The number of bullish hedge fund positions retreated by 2 in recent months. PacWest Bancorp (NASDAQ:PACW) was in 29 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 31. Our calculations also showed that PACW isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 31 hedge funds in our database with PACW holdings at the end of March.

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 S&P 500 ETFs by 79 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 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.

Matthew Lindenbaum Basswood Capital
Matthew Lindenbaum Basswood Capital

Matthew Lindenbaum of Basswood Capital

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 EV 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. Now let's take a look at the recent hedge fund action surrounding PacWest Bancorp (NASDAQ:PACW).

Do Hedge Funds Think PACW Is A Good Stock To Buy Now?

At Q2's end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from the first quarter of 2020. On the other hand, there were a total of 24 hedge funds with a bullish position in PACW a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Cardinal Capital held the most valuable stake in PacWest Bancorp (NASDAQ:PACW), which was worth $216.9 million at the end of the second quarter. On the second spot was Citadel Investment Group which amassed $112.6 million worth of shares. Fisher Asset Management, Azora Capital, and Basswood Capital 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 Cardinal Capital allocated the biggest weight to PacWest Bancorp (NASDAQ:PACW), around 5.19% of its 13F portfolio. Azora Capital is also relatively very bullish on the stock, setting aside 4.85 percent of its 13F equity portfolio to PACW.

Since PacWest Bancorp (NASDAQ:PACW) has faced bearish sentiment from the entirety of the hedge funds we track, it's safe to say that there is a sect of fund managers that slashed their full holdings by the end of the second quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dumped the biggest position of the 750 funds monitored by Insider Monkey, valued at about $24.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund cut about $11.9 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 2 funds by the end of the second quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as PacWest Bancorp (NASDAQ:PACW) but similarly valued. These stocks are United Bankshares, Inc. (NASDAQ:UBSI), Cirrus Logic, Inc. (NASDAQ:CRUS), Park Hotels & Resorts Inc. (NYSE:PK), AppFolio Inc (NASDAQ:APPF), Selective Insurance Group, Inc. (NASDAQ:SIGI), The Hanover Insurance Group, Inc. (NYSE:THG), and Agora, Inc. (NASDAQ:API). This group of stocks' market values resemble PACW's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UBSI,9,21024,0 CRUS,29,450723,3 PK,19,120551,1 APPF,17,406389,5 SIGI,14,36664,1 THG,16,91408,-2 API,17,564058,0 Average,17.3,241545,1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.3 hedge funds with bullish positions and the average amount invested in these stocks was $242 million. That figure was $594 million in PACW's case. Cirrus Logic, Inc. (NASDAQ:CRUS) is the most popular stock in this table. On the other hand United Bankshares, Inc. (NASDAQ:UBSI) is the least popular one with only 9 bullish hedge fund positions. PacWest Bancorp (NASDAQ:PACW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PACW is 81.1. 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 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. Hedge funds were also right about betting on PACW as the stock returned 16.2% since the end of Q2 (through 10/15) 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.