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Were Hedge Funds Right About Betting On Preferred Bank (PFBC)?

Nina Todic

Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Preferred Bank (NASDAQ:PFBC) has seen an increase in enthusiasm from smart money recently. Our calculations also showed that PFBC isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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' 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Lindenbaum Basswood Capital

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a gander at the fresh hedge fund action regarding Preferred Bank (NASDAQ:PFBC).

How have hedgies been trading Preferred Bank (NASDAQ:PFBC)?

At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from one quarter earlier. On the other hand, there were a total of 12 hedge funds with a bullish position in PFBC a year ago. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

No of Hedge Funds with PFBC Positions

The largest stake in Preferred Bank (NASDAQ:PFBC) was held by Renaissance Technologies, which reported holding $18.2 million worth of stock at the end of March. It was followed by Basswood Capital with a $7.9 million position. Other investors bullish on the company included Marshall Wace LLP, Millennium Management, and Citadel Investment Group.

Consequently, key money managers were breaking ground themselves. Driehaus Capital, managed by Richard Driehaus, established the biggest position in Preferred Bank (NASDAQ:PFBC). Driehaus Capital had $0.6 million invested in the company at the end of the quarter. Benjamin A. Smith's Laurion Capital Management also made a $0.2 million investment in the stock during the quarter.

Let's also examine hedge fund activity in other stocks similar to Preferred Bank (NASDAQ:PFBC). We will take a look at Mr. Cooper Group Inc. (NASDAQ:COOP), Falcon Minerals Corporation (NASDAQ:FLMN), P.H. Glatfelter Company (NYSE:GLT), and e.l.f. Beauty, Inc. (NYSE:ELF). All of these stocks' market caps match PFBC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COOP,23,237258,-4 FLMN,22,119468,5 GLT,6,16606,-4 ELF,18,198724,0 Average,17.25,143014,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $143 million. That figure was $39 million in PFBC's case. Mr. Cooper Group Inc. (NASDAQ:COOP) is the most popular stock in this table. On the other hand P.H. Glatfelter Company (NYSE:GLT) 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on PFBC as the stock returned 11.6% during the same time frame and outperformed the market by an even larger margin.

Disclosure: None. This article was originally published at Insider Monkey.

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