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Were Hedge Funds Right About Dumping Patterson-UTI Energy, Inc. (PTEN)?

Abigail Fisher

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Patterson-UTI Energy, Inc. (NASDAQ:PTEN).

Patterson-UTI Energy, Inc. (NASDAQ:PTEN) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. PTEN was in 25 hedge funds' portfolios at the end of the second quarter of 2019. There were 34 hedge funds in our database with PTEN positions at the end of the previous quarter. Our calculations also showed that PTEN 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

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 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.

PTEN_oct2019

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. Let's go over the recent hedge fund action surrounding Patterson-UTI Energy, Inc. (NASDAQ:PTEN).

Hedge fund activity in Patterson-UTI Energy, Inc. (NASDAQ:PTEN)

Heading into the third quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PTEN over the last 16 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Irving Kahn

When looking at the institutional investors followed by Insider Monkey, Cliff Asness's AQR Capital Management has the largest position in Patterson-UTI Energy, Inc. (NASDAQ:PTEN), worth close to $77.4 million, amounting to 0.1% of its total 13F portfolio. On AQR Capital Management's heels is Renaissance Technologies, holding a $74.5 million position; 0.1% of its 13F portfolio is allocated to the company. Some other professional money managers with similar optimism consist of Israel Englander's Millennium Management, Irving Kahn's Kahn Brothers and Ken Fisher's Fisher Asset Management.

Since Patterson-UTI Energy, Inc. (NASDAQ:PTEN) has experienced declining sentiment from hedge fund managers, it's easy to see that there lies a certain "tier" of hedge funds that elected to cut their entire stakes in the second quarter. Interestingly, Till Bechtolsheimer's Arosa Capital Management said goodbye to the biggest stake of the "upper crust" of funds watched by Insider Monkey, totaling close to $10.9 million in stock. Robert Rodriguez and Steven Romick's fund, First Pacific Advisors LLC, also dumped its stock, about $9.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 9 funds in the second quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Patterson-UTI Energy, Inc. (NASDAQ:PTEN) but similarly valued. We will take a look at Medpace Holdings, Inc. (NASDAQ:MEDP), Allegiant Travel Company (NASDAQ:ALGT), Pattern Energy Group Inc (NASDAQ:PEGI), and Qudian Inc. (NYSE:QD). This group of stocks' market values resemble PTEN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MEDP,15,194424,-9 ALGT,18,473360,-2 PEGI,12,35680,2 QD,22,170536,4 Average,16.75,218500,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $219 million. That figure was $289 million in PTEN's case. Qudian Inc. (NYSE:QD) is the most popular stock in this table. On the other hand Pattern Energy Group Inc (NASDAQ:PEGI) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is more popular among hedge funds. 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. Unfortunately PTEN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on PTEN were disappointed as the stock returned -25.4% during the third 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 many of these stocks already outperformed the market in Q3.

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

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