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Were Hedge Funds Right About Flocking Into Pinduoduo Inc. (PDD) ?

Reymerlyn Martin

"The end to the U.S. Government shutdown, reports of progress on China-U.S. trade talks, and the Federal Reserve’s confirmation that it did not plan further interest rate hikes in 2019 allayed investor fears and drove U.S. markets substantially higher in the first quarter of the year. Global markets followed suit pretty much across the board delivering what some market participants described as a “V-shaped” recovery," This is how Evermore Global Value summarized the first quarter in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

Pinduoduo Inc. (NASDAQ:PDD) has experienced an increase in support from the world's most elite money managers recently. Our calculations also showed that PDD isn't among the 30 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' 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 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 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.

Brad Gerstner Altimeter Capital

We're going to review the fresh hedge fund action surrounding Pinduoduo Inc. (NASDAQ:PDD).

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

At Q1's end, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 60% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in PDD a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

PDD_jun2019

More specifically, Tairen Capital was the largest shareholder of Pinduoduo Inc. (NASDAQ:PDD), with a stake worth $94.3 million reported as of the end of March. Trailing Tairen Capital was Altimeter Capital Management, which amassed a stake valued at $61.7 million. SCGE Management, Hillhouse Capital Management, and Platinum Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, key money managers were breaking ground themselves. Tairen Capital, managed by Larry Chen and Terry Zhang, assembled the largest position in Pinduoduo Inc. (NASDAQ:PDD). Tairen Capital had $94.3 million invested in the company at the end of the quarter. Christopher Lyle's SCGE Management also made a $47.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Kerr Neilson's Platinum Asset Management, Ted Kang's Kylin Management, and Daniel Patrick Gibson's Sylebra Capital Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Pinduoduo Inc. (NASDAQ:PDD) but similarly valued. These stocks are IQVIA Holdings, Inc. (NYSE:IQV), Amphenol Corporation (NYSE:APH), Fortive Corporation (NYSE:FTV), and TD Ameritrade Holding Corp. (NASDAQ:AMTD). This group of stocks' market values are closest to PDD's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IQV,64,5288724,15 APH,25,518087,4 FTV,26,472153,-4 AMTD,30,434471,13 Average,36.25,1678359,7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.25 hedge funds with bullish positions and the average amount invested in these stocks was $1678 million. That figure was $496 million in PDD's case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Amphenol Corporation (NYSE:APH) is the least popular one with only 25 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately PDD wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); PDD investors were disappointed as the stock returned -20.8% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.

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

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