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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in PRA Group, Inc. (NASDAQ:PRAA)? The smart money sentiment can provide an answer to this question.
Is PRAA a good stock to buy now? PRA Group, Inc. (NASDAQ:PRAA) was in 19 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 17. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. PRAA shareholders have witnessed an increase in hedge fund sentiment of late. There were 13 hedge funds in our database with PRAA holdings at the end of June. Our calculations also showed that PRAA 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.
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 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.
Ken Heebner of Capital Growth Management
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. Now we're going to take a look at the new hedge fund action encompassing PRA Group, Inc. (NASDAQ:PRAA).
Do Hedge Funds Think PRAA Is A Good Stock To Buy Now?
At third quarter's end, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 46% from one quarter earlier. On the other hand, there were a total of 11 hedge funds with a bullish position in PRAA a year ago. 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, D E Shaw held the most valuable stake in PRA Group, Inc. (NASDAQ:PRAA), which was worth $20.3 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $17.1 million worth of shares. Intrinsic Edge Capital, Arrowstreet Capital, and Marshall Wace LLP 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 Intrinsic Edge Capital allocated the biggest weight to PRA Group, Inc. (NASDAQ:PRAA), around 0.54% of its 13F portfolio. Voce Capital is also relatively very bullish on the stock, designating 0.52 percent of its 13F equity portfolio to PRAA.
As one would reasonably expect, some big names were leading the bulls' herd. Winton Capital Management, managed by David Harding, established the most valuable position in PRA Group, Inc. (NASDAQ:PRAA). Winton Capital Management had $1.9 million invested in the company at the end of the quarter. Ken Heebner's Capital Growth Management also initiated a $1.6 million position during the quarter. The following funds were also among the new PRAA investors: Israel Englander's Millennium Management, J. Daniel Plants's Voce Capital, and Mika Toikka's AlphaCrest Capital Management.
Let's go over hedge fund activity in other stocks similar to PRA Group, Inc. (NASDAQ:PRAA). These stocks are SPX FLOW, Inc. (NYSE:FLOW), Yext, Inc. (NYSE:YEXT), American National Group Inc. (NASDAQ:ANAT), IAMGOLD Corporation (NYSE:IAG), Investors Bancorp, Inc. (NASDAQ:ISBC), Ambarella Inc (NASDAQ:AMBA), and Euronav NV (NYSE:EURN). This group of stocks' market caps resemble PRAA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FLOW,13,153359,3 YEXT,11,24921,1 ANAT,12,30001,2 IAG,16,151044,-2 ISBC,28,138234,3 AMBA,34,191991,7 EURN,11,67614,-6 Average,17.9,108166,1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.9 hedge funds with bullish positions and the average amount invested in these stocks was $108 million. That figure was $70 million in PRAA's case. Ambarella Inc (NASDAQ:AMBA) is the most popular stock in this table. On the other hand Yext, Inc. (NYSE:YEXT) is the least popular one with only 11 bullish hedge fund positions. PRA Group, Inc. (NASDAQ:PRAA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for PRAA is 57.4. 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. 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 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 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately PRAA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PRAA were disappointed as the stock returned 4.3% since the end of September (through 12/14) 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.
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