Amid an overall bull market, many stocks that smart money investors were collectively bullish on 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. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Pegasystems Inc. (NASDAQ:PEGA) worth your attention right now? Investors who are in the know are reducing their bets on the stock. The number of long hedge fund bets were cut by 1 lately. Our calculations also showed that PEGA 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.
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.
[caption id="attachment_256969" align="aligncenter" width="600"] Christian Leone by Luxor Capital[/caption]
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 glance at the latest hedge fund action surrounding Pegasystems Inc. (NASDAQ:PEGA).
Hedge fund activity in Pegasystems Inc. (NASDAQ:PEGA)
At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PEGA over the last 17 quarters. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
Among these funds, Luxor Capital Group held the most valuable stake in Pegasystems Inc. (NASDAQ:PEGA), which was worth $223.4 million at the end of the third quarter. On the second spot was SQN Investors which amassed $121.8 million worth of shares. Cadian Capital, Fisher Asset Management, and Dorsal 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 SQN Investors allocated the biggest weight to Pegasystems Inc. (NASDAQ:PEGA), around 12.8% of its 13F portfolio. Totem Point Management is also relatively very bullish on the stock, designating 10.31 percent of its 13F equity portfolio to PEGA.
Judging by the fact that Pegasystems Inc. (NASDAQ:PEGA) has faced a decline in interest from the aggregate hedge fund industry, it's easy to see that there exists a select few fund managers who sold off their entire stakes heading into Q4. Interestingly, Jacob Doft's Highline Capital Management cut the largest position of the "upper crust" of funds tracked by Insider Monkey, totaling an estimated $35.8 million in stock. Brian Ashford-Russell and Tim Woolley's fund, Polar Capital, also dumped its stock, about $27.7 million worth. These transactions are important to note, as total hedge fund interest was cut by 1 funds heading into Q4.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Pegasystems Inc. (NASDAQ:PEGA) but similarly valued. These stocks are Polaris Inc. (NYSE:PII), Acuity Brands, Inc. (NYSE:AYI), Quanta Services Inc (NYSE:PWR), and Lincoln Electric Holdings, Inc. (NASDAQ:LECO). This group of stocks' market caps are similar to PEGA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PII,25,358943,1 AYI,26,897765,3 PWR,30,881523,1 LECO,16,256053,-6 Average,24.25,598571,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $599 million. That figure was $733 million in PEGA's case. Quanta Services Inc (NYSE:PWR) is the most popular stock in this table. On the other hand Lincoln Electric Holdings, Inc. (NASDAQ:LECO) is the least popular one with only 16 bullish hedge fund positions. Pegasystems Inc. (NASDAQ:PEGA) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on PEGA as the stock returned 14.1% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.