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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards PQ Group Holdings Inc. (NYSE:PQG).
Is PQG a good stock to buy now? PQ Group Holdings Inc. (NYSE:PQG) was in 13 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 20. PQG investors should be aware of an increase in hedge fund interest in recent months. There were 6 hedge funds in our database with PQG holdings at the end of June. Our calculations also showed that PQG isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 66 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Stuart Zimmer of Zimmer Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. Keeping this in mind let's take a look at the key hedge fund action regarding PQ Group Holdings Inc. (NYSE:PQG).
Do Hedge Funds Think PQG Is A Good Stock To Buy Now?
At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 117% from one quarter earlier. By comparison, 8 hedge funds held shares or bullish call options in PQG a year ago. With hedgies' sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Jeffrey Bronchick's Cove Street Capital has the largest position in PQ Group Holdings Inc. (NYSE:PQG), worth close to $16.2 million, accounting for 3.1% of its total 13F portfolio. On Cove Street Capital's heels is Zimmer Partners, led by Stuart J. Zimmer, holding a $7.4 million position; 0.1% of its 13F portfolio is allocated to the stock. Some other professional money managers that are bullish contain Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, D. E. Shaw's D E Shaw and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Cove Street Capital allocated the biggest weight to PQ Group Holdings Inc. (NYSE:PQG), around 3.06% of its 13F portfolio. Zimmer Partners is also relatively very bullish on the stock, designating 0.11 percent of its 13F equity portfolio to PQG.
As industrywide interest jumped, key money managers have jumped into PQ Group Holdings Inc. (NYSE:PQG) headfirst. Cove Street Capital, managed by Jeffrey Bronchick, established the biggest position in PQ Group Holdings Inc. (NYSE:PQG). Cove Street Capital had $16.2 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace LLP also made a $0.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Cliff Asness's AQR Capital Management, Greg Eisner's Engineers Gate Manager, and Alec Litowitz and Ross Laser's Magnetar Capital.
Let's now take a look at hedge fund activity in other stocks similar to PQ Group Holdings Inc. (NYSE:PQG). These stocks are ALX Oncology Holdings Inc. (NASDAQ:ALXO), Two Harbors Investment Corp (NYSE:TWO), Axos Financial, Inc. (NYSE:AX), Mednax Inc. (NYSE:MD), SITE Centers Corp. (NYSE:SITC), Chesapeake Utilities Corporation (NYSE:CPK), and Tri Continental Corporation (NYSE:TY). This group of stocks' market valuations are similar to PQG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALXO,9,361214,9 TWO,17,36539,1 AX,15,48303,-2 MD,22,338189,-1 SITC,14,41182,-1 CPK,7,9195,-2 TY,2,556,-1 Average,12.3,119311,0.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.3 hedge funds with bullish positions and the average amount invested in these stocks was $119 million. That figure was $37 million in PQG's case. Mednax Inc. (NYSE:MD) is the most popular stock in this table. On the other hand Tri Continental Corporation (NYSE:TY) is the least popular one with only 2 bullish hedge fund positions. PQ Group Holdings Inc. (NYSE:PQG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PQG is 57. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Hedge funds were also right about betting on PQG as the stock returned 34.9% since the end of Q3 (through 12/8) 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.