We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Primoris Services Corp (NASDAQ:PRIM) and determine whether hedge funds skillfully traded this stock.
Hedge fund interest in Primoris Services Corp (NASDAQ:PRIM) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare PRIM to other stocks including Turquoise Hill Resources Ltd (NYSE:TRQ), Ferro Corporation (NYSE:FOE), and Rocket Pharmaceuticals, Inc. (NASDAQ:RCKT) to get a better sense of its popularity. 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 58 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.
[caption id="attachment_30621" align="aligncenter" width="392"] Cliff Asness of AQR Capital Management[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to take a look at the latest hedge fund action regarding Primoris Services Corp (NASDAQ:PRIM).
What have hedge funds been doing with Primoris Services Corp (NASDAQ:PRIM)?
At the end of the first quarter, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in PRIM a year ago. With hedge funds' sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Divisar Capital was the largest shareholder of Primoris Services Corp (NASDAQ:PRIM), with a stake worth $12.5 million reported as of the end of September. Trailing Divisar Capital was Value Holdings LP, which amassed a stake valued at $6.9 million. Royce & Associates, Citadel Investment Group, and AQR 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 Divisar Capital allocated the biggest weight to Primoris Services Corp (NASDAQ:PRIM), around 4.87% of its 13F portfolio. Value Holdings LP is also relatively very bullish on the stock, setting aside 3.29 percent of its 13F equity portfolio to PRIM.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Millennium Management. 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Value Holdings LP).
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Primoris Services Corp (NASDAQ:PRIM) but similarly valued. We will take a look at Turquoise Hill Resources Ltd (NYSE:TRQ), Ferro Corporation (NYSE:FOE), Rocket Pharmaceuticals, Inc. (NASDAQ:RCKT), and Livent Corporation (NYSE:LTHM). This group of stocks' market valuations are similar to PRIM's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRQ,14,156233,-2 FOE,16,117594,0 RCKT,15,172485,-6 LTHM,15,34884,-1 Average,15,120299,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $33 million in PRIM's case. Ferro Corporation (NYSE:FOE) is the most popular stock in this table. On the other hand Turquoise Hill Resources Ltd (NYSE:TRQ) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Primoris Services Corp (NASDAQ:PRIM) is even less popular than TRQ. Hedge funds dodged a bullet by taking a bearish stance towards PRIM. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately PRIM wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); PRIM investors were disappointed as the stock returned 12.1% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.