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 37.6% in 2019 (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.
Preferred Bank (NASDAQ:PFBC) shareholders have witnessed a decrease in support from the world's most elite money managers lately. Our calculations also showed that PFBC 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.
Why do we pay any attention at all to hedge fund sentiment? 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_735636" align="aligncenter" width="1613"] Matthew Lindenbaum of Basswood Capital[/caption]
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let's take a look at the new hedge fund action encompassing Preferred Bank (NASDAQ:PFBC).
How are hedge funds trading Preferred Bank (NASDAQ:PFBC)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the second quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in PFBC 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.
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the biggest position in Preferred Bank (NASDAQ:PFBC), worth close to $21.8 million, comprising less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is Basswood Capital, managed by Matthew Lindenbaum, which holds a $8.8 million position; 0.6% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism consist of Ken Griffin's Citadel Investment Group, John Overdeck and David Siegel's Two Sigma Advisors and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital. In terms of the portfolio weights assigned to each position Basswood Capital allocated the biggest weight to Preferred Bank (NASDAQ:PFBC), around 0.64% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, earmarking 0.27 percent of its 13F equity portfolio to PFBC.
Since Preferred Bank (NASDAQ:PFBC) has faced declining sentiment from hedge fund managers, it's easy to see that there were a few hedgies that slashed their entire stakes heading into Q4. Intriguingly, Paul Marshall and Ian Wace's Marshall Wace said goodbye to the largest stake of the "upper crust" of funds tracked by Insider Monkey, valued at about $4.3 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund dropped about $3.5 million worth. These transactions are important to note, as total hedge fund interest dropped by 2 funds heading into Q4.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Preferred Bank (NASDAQ:PFBC) but similarly valued. We will take a look at Seabridge Gold, Inc. (NYSE:SA), GoPro Inc (NASDAQ:GPRO), Oritani Financial Corp. (NASDAQ:ORIT), and Homology Medicines, Inc. (NASDAQ:FIXX). This group of stocks' market valuations are similar to PFBC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SA,6,39255,-3 GPRO,16,181016,-3 ORIT,8,43932,2 FIXX,12,174472,-6 Average,10.5,109669,-2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $110 million. That figure was $38 million in PFBC's case. GoPro Inc (NASDAQ:GPRO) is the most popular stock in this table. On the other hand Seabridge Gold, Inc. (NYSE:SA) is the least popular one with only 6 bullish hedge fund positions. Preferred Bank (NASDAQ:PFBC) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately PFBC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PFBC investors were disappointed as the stock returned 5.9% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.