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Were Hedge Funds Right About Dumping PennyMac Financial Services Inc (PFSI) ?

Reymerlyn Martin

You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.

PennyMac Financial Services Inc (NYSE:PFSI) was in 10 hedge funds' portfolios at the end of December. PFSI shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 16 hedge funds in our database with PFSI positions at the end of the previous quarter. Our calculations also showed that PFSI isn't among the 30 most popular stocks among hedge funds.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Nathaniel August - Mangrove Partners

We're going to take a look at the fresh hedge fund action encompassing PennyMac Financial Services Inc (NYSE:PFSI).

Hedge fund activity in PennyMac Financial Services Inc (NYSE:PFSI)

At the end of the fourth quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -38% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PFSI over the last 14 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

PFSI_may2019

Among these funds, Rima Senvest Management held the most valuable stake in PennyMac Financial Services Inc (NYSE:PFSI), which was worth $30.7 million at the end of the fourth quarter. On the second spot was Basswood Capital which amassed $28.6 million worth of shares. Moreover, Omega Advisors, Mangrove Partners, and PAR Capital Management were also bullish on PennyMac Financial Services Inc (NYSE:PFSI), allocating a large percentage of their portfolios to this stock.

Since PennyMac Financial Services Inc (NYSE:PFSI) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there were a few money managers that elected to cut their full holdings by the end of the third quarter. Interestingly, Andrew Weiss's Weiss Asset Management said goodbye to the biggest position of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $2.1 million in stock, and Jim Simons's Renaissance Technologies was right behind this move, as the fund said goodbye to about $1.9 million worth. These transactions are interesting, as total hedge fund interest was cut by 6 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to PennyMac Financial Services Inc (NYSE:PFSI). We will take a look at Kura Oncology, Inc. (NASDAQ:KURA), ANI Pharmaceuticals Inc (NASDAQ:ANIP), Community Healthcare Trust Inc (NYSE:CHCT), and Myers Industries, Inc. (NYSE:MYE). This group of stocks' market values are similar to PFSI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KURA,15,187278,-5 ANIP,13,46690,-4 CHCT,9,63252,0 MYE,8,84723,0 Average,11.25,95486,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $124 million in PFSI's case. Kura Oncology, Inc. (NASDAQ:KURA) is the most popular stock in this table. On the other hand Myers Industries, Inc. (NYSE:MYE) is the least popular one with only 8 bullish hedge fund positions. PennyMac Financial Services Inc (NYSE:PFSI) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately PFSI wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); PFSI investors were disappointed as the stock returned 4.5% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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

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