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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. In this article we are going to take a look at smart money sentiment towards PagSeguro Digital Ltd. (NYSE:PAGS).
Is PagSeguro Digital Ltd. (NYSE:PAGS) undervalued? The smart money is becoming hopeful. The number of long hedge fund positions went up by 5 in recent months. Our calculations also showed that PAGS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). PAGS was in 35 hedge funds' portfolios at the end of the third quarter of 2019. There were 30 hedge funds in our database with PAGS 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's review the fresh hedge fund action encompassing PagSeguro Digital Ltd. (NYSE:PAGS).
What does smart money think about PagSeguro Digital Ltd. (NYSE:PAGS)?
Heading into the fourth quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PAGS over the last 17 quarters. 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, Sylebra Capital Management held the most valuable stake in PagSeguro Digital Ltd. (NYSE:PAGS), which was worth $340.9 million at the end of the third quarter. On the second spot was Melvin Capital Management which amassed $247.5 million worth of shares. Hunt Lane Capital, Samlyn Capital, and Echo Street Capital Management 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 Hunt Lane Capital allocated the biggest weight to PagSeguro Digital Ltd. (NYSE:PAGS), around 18.45% of its 13F portfolio. Tekne Capital Management is also relatively very bullish on the stock, dishing out 17.44 percent of its 13F equity portfolio to PAGS.
As industrywide interest jumped, specific money managers have been driving this bullishness. Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, established the largest position in PagSeguro Digital Ltd. (NYSE:PAGS). Polar Capital had $33 million invested in the company at the end of the quarter. Josh Donfeld and David Rogers's Castle Hook Partners also initiated a $28.8 million position during the quarter. The other funds with brand new PAGS positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali's Alta Park Capital, and Pasco Alfaro / Richard Tumure's Miura Global Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as PagSeguro Digital Ltd. (NYSE:PAGS) but similarly valued. These stocks are CenterPoint Energy, Inc. (NYSE:CNP), Magellan Midstream Partners, L.P. (NYSE:MMP), Celanese Corporation (NYSE:CE), and CBS Corporation (NYSE:CBS). This group of stocks' market values resemble PAGS's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CNP,27,1089888,-2 MMP,12,55553,2 CE,18,944524,-2 CBS,49,1742539,-1 Average,26.5,958126,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $958 million. That figure was $1381 million in PAGS's case. CBS Corporation (NYSE:CBS) is the most popular stock in this table. On the other hand Magellan Midstream Partners, L.P. (NYSE:MMP) is the least popular one with only 12 bullish hedge fund positions. PagSeguro Digital Ltd. (NYSE:PAGS) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on PAGS as the stock returned 80.5% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.