It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. 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) going to take off soon? Money managers are becoming less hopeful. The number of bullish hedge fund positions fell by 5 recently. Our calculations also showed that pstg isn't among the 30 most popular stocks among hedge funds. PSTG was in 21 hedge funds' portfolios at the end of March. There were 26 hedge funds in our database with PSTG holdings at the end of the previous quarter.
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 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.
We're going to view the fresh hedge fund action regarding Pure Storage, Inc. (NYSE:PSTG).
How are hedge funds trading Pure Storage, Inc. (NYSE:PSTG)?
Heading into the second quarter of 2019, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards PSTG over the last 15 quarters. With hedge funds' capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in Pure Storage, Inc. (NYSE:PSTG) was held by Citadel Investment Group, which reported holding $181.6 million worth of stock at the end of March. It was followed by Renaissance Technologies with a $136.2 million position. Other investors bullish on the company included Eminence Capital, Alyeska Investment Group, and Two Sigma Advisors.
Because Pure Storage, Inc. (NYSE:PSTG) has experienced bearish sentiment from hedge fund managers, it's easy to see that there lies a certain "tier" of hedgies who were dropping their full holdings in the third quarter. Interestingly, Principal Global Investors's Columbus Circle Investors cut the biggest stake of the "upper crust" of funds monitored by Insider Monkey, comprising an estimated $19.8 million in stock, and Steve Cohen's Point72 Asset Management was right behind this move, as the fund cut about $8.5 million worth. These transactions are interesting, as total hedge fund interest fell by 5 funds in the third quarter.
Let's now review hedge fund activity in other stocks similar to Pure Storage, Inc. (NYSE:PSTG). We will take a look at AGCO Corporation (NYSE:AGCO), Quanta Services Inc (NYSE:PWR), Vipshop Holdings Limited (NYSE:VIPS), and Array Biopharma Inc (NASDAQ:ARRY). This group of stocks' market caps resemble PSTG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGCO,26,200918,-6 PWR,24,831906,-3 VIPS,17,125275,-5 ARRY,32,1106924,1 Average,24.75,566256,-3.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $566 million. That figure was $726 million in PSTG's case. Array Biopharma Inc (NASDAQ:ARRY) is the most popular stock in this table. On the other hand Vipshop Holdings Limited (NYSE:VIPS) is the least popular one with only 17 bullish hedge fund positions. Pure Storage, Inc. (NYSE:PSTG) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately PSTG wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PSTG investors were disappointed as the stock returned -25.7% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.