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Were Hedge Funds Right About Souring On Pinduoduo Inc. (PDD)?

Abigail Fisher

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Pinduoduo Inc. (NASDAQ:PDD).

Is Pinduoduo Inc. (NASDAQ:PDD) worth your attention right now? Investors who are in the know are getting less bullish. The number of bullish hedge fund bets fell by 1 recently. Our calculations also showed that PDD isn't among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

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We're going to go over the key hedge fund action encompassing Pinduoduo Inc. (NASDAQ:PDD).

Hedge fund activity in Pinduoduo Inc. (NASDAQ:PDD)

At Q4's end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PDD over the last 14 quarters. With the smart money's capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

PDD_mar2019

The largest stake in Pinduoduo Inc. (NASDAQ:PDD) was held by Altimeter Capital Management, which reported holding $55.8 million worth of stock at the end of September. It was followed by Hillhouse Capital Management with a $32.3 million position. Other investors bullish on the company included Segantii Capital, Tiger Global Management LLC, and Serenity Capital.

Because Pinduoduo Inc. (NASDAQ:PDD) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there is a sect of fund managers that decided to sell off their full holdings heading into Q3. It's worth mentioning that Andreas Halvorsen's Viking Global dropped the largest position of the "upper crust" of funds monitored by Insider Monkey, totaling about $37.1 million in stock. Philippe Laffont's fund, Coatue Management, also said goodbye to its stock, about $28.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q3.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Pinduoduo Inc. (NASDAQ:PDD) but similarly valued. We will take a look at Thomson Reuters Corporation (NYSE:TRI), PPG Industries, Inc. (NYSE:PPG), Amphenol Corporation (NYSE:APH), and Ferrari N.V. (NYSE:RACE). This group of stocks' market values are similar to PDD's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRI,19,191623,-5 PPG,19,820414,-3 APH,21,478702,-4 RACE,28,854998,2 Average,21.75,586434,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $586 million. That figure was $181 million in PDD's case. Ferrari N.V. (NYSE:RACE) is the most popular stock in this table. On the other hand Thomson Reuters Corporation (NYSE:TRI) is the least popular one with only 19 bullish hedge fund positions. Pinduoduo Inc. (NASDAQ:PDD) 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 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately PDD wasn't in this group. Hedge funds that bet on PDD were disappointed as the stock returned 9.3% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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