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Were Hedge Funds Right About Piling Into PDL BioPharma Inc. (PDLI)?

Reymerlyn Martin

How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding PDL BioPharma Inc. (NASDAQ:PDLI).

PDL BioPharma Inc. (NASDAQ:PDLI) shareholders have witnessed an increase in activity from the world's largest hedge funds recently. Our calculations also showed that PDLI 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 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.

[caption id="attachment_750227" align="aligncenter" width="473"] Alex Litowitz of Magnetar Capital[/caption]

Alex Litowitz Magnetar Capital

Let's go over the key hedge fund action surrounding PDL BioPharma Inc. (NASDAQ:PDLI).

What have hedge funds been doing with PDL BioPharma Inc. (NASDAQ:PDLI)?

At Q4's end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PDLI over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

PDLI_may2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies, managed by Jim Simons, holds the biggest position in PDL BioPharma Inc. (NASDAQ:PDLI). Renaissance Technologies has a $26.3 million position in the stock, comprising less than 0.1%% of its 13F portfolio. On Renaissance Technologies's heels is D. E. Shaw of D E Shaw, with a $6.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish consist of Cliff Asness's AQR Capital Management, John Overdeck and David Siegel's Two Sigma Advisors and Frederick DiSanto's Ancora Advisors.

Now, specific money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the largest position in PDL BioPharma Inc. (NASDAQ:PDLI). Arrowstreet Capital had $0.3 million invested in the company at the end of the quarter. Alec Litowitz and Ross Laser's Magnetar Capital also made a $0.3 million investment in the stock during the quarter. The following funds were also among the new PDLI investors: Ronald Hua's Qtron Investments, Andrew Feldstein and Stephen Siderow's Blue Mountain Capital, and Benjamin A. Smith's Laurion Capital Management.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as PDL BioPharma Inc. (NASDAQ:PDLI) but similarly valued. These stocks are Barrett Business Services, Inc. (NASDAQ:BBSI), Allied Motion Technologies, Inc. (NASDAQ:AMOT), CIRCOR International, Inc. (NYSE:CIR), and EZCORP Inc (NASDAQ:EZPW). This group of stocks' market caps resemble PDLI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BBSI,13,64664,0 AMOT,12,39294,-2 CIR,6,98829,1 EZPW,20,106153,1 Average,12.75,77235,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $77 million. That figure was $57 million in PDLI's case. EZCORP Inc (NASDAQ:EZPW) is the most popular stock in this table. On the other hand CIRCOR International, Inc. (NYSE:CIR) is the least popular one with only 6 bullish hedge fund positions. PDL BioPharma Inc. (NASDAQ:PDLI) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on PDLI, though not to the same extent, as the stock returned 20.3% and outperformed the market as well.

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

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