In this article we will check out the progression of hedge fund sentiment towards Performant Financial Corp (NASDAQ:PFMT) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Performant Financial Corp (NASDAQ:PFMT) has seen a decrease in hedge fund interest of late. PFMT was in 3 hedge funds' portfolios at the end of the first quarter of 2020. There were 4 hedge funds in our database with PFMT positions at the end of the previous quarter. Our calculations also showed that PFMT isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: 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' 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 44 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.
[caption id="attachment_26073" align="aligncenter" width="397"] Jim Simons Founder of Renaissance Technologies[/caption]
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, legendary investor Bill Miller told investors to sell 7 extremely popular recession stocks last month. So, we went through his list and recommended another stock with 100% upside potential instead. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's take a peek at the key hedge fund action encompassing Performant Financial Corp (NASDAQ:PFMT).
Hedge fund activity in Performant Financial Corp (NASDAQ:PFMT)
At Q1's end, a total of 3 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PFMT over the last 18 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, Prescott Group Capital Management held the most valuable stake in Performant Financial Corp (NASDAQ:PFMT), which was worth $11.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $0.9 million worth of shares. Millennium Management was 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 Prescott Group Capital Management allocated the biggest weight to Performant Financial Corp (NASDAQ:PFMT), around 5.6% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, designating 0.0008 percent of its 13F equity portfolio to PFMT.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Citadel Investment Group. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified PFMT as a viable investment and initiated a position in the stock.
Let's also examine hedge fund activity in other stocks similar to Performant Financial Corp (NASDAQ:PFMT). We will take a look at Milestone Pharmaceuticals Inc. (NASDAQ:MIST), Home Federal Bancorp Inc of Louisiana (NASDAQ:HFBL), Smart Sand, Inc. (NASDAQ:SND), and Canterbury Park Holding Corporation (NASDAQ:CPHC). This group of stocks' market values resemble PFMT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MIST,5,958,-2 HFBL,1,637,0 SND,4,1207,-5 CPHC,1,4598,0 Average,2.75,1850,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 2.75 hedge funds with bullish positions and the average amount invested in these stocks was $2 million. That figure was $12 million in PFMT's case. Milestone Pharmaceuticals Inc. (NASDAQ:MIST) is the most popular stock in this table. On the other hand Home Federal Bancorp Inc of Louisiana (NASDAQ:HFBL) is the least popular one with only 1 bullish hedge fund positions. Performant Financial Corp (NASDAQ:PFMT) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 7.9% in 2020 through May 22nd but beat the market by 15.6 percentage points. Unfortunately PFMT wasn't nearly as popular as these 10 stocks and hedge funds that were betting on PFMT were disappointed as the stock returned -20% 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 10 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.