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Were Hedge Funds Right About Piling Into Pentair plc (PNR)?

Nina Todic

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. An average long/short hedge fund returned only 5% due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. 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 Pentair plc (NYSE:PNR).

Pentair plc (NYSE:PNR) shareholders have witnessed an increase in support from the world's most elite money managers lately. PNR was in 25 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 24 hedge funds in our database with PNR holdings at the end of the previous quarter. Our calculations also showed that PNR 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.

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We're going to take a look at the latest hedge fund action regarding Pentair plc (NYSE:PNR).

What have hedge funds been doing with Pentair plc (NYSE:PNR)?

At the end of the fourth quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PNR over the last 14 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

PNR

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Trian Partners, managed by Nelson Peltz, holds the most valuable position in Pentair plc (NYSE:PNR). Trian Partners has a $324.2 million position in the stock, comprising 3.5% of its 13F portfolio. Coming in second is Ian Simm of Impax Asset Management, with a $127.9 million position; the fund has 2.1% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism contain Ken Griffin's Citadel Investment Group, John Overdeck and David Siegel's Two Sigma Advisors and Matt Simon (Citadel)'s Ashler Capital.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in Pentair plc (NYSE:PNR). Citadel Investment Group had $46.3 million invested in the company at the end of the quarter. Ashler Capital also made a $26.4 million investment in the stock during the quarter. The following funds were also among the new PNR investors: Minhua Zhang's Weld Capital Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Ronald Hua's Qtron Investments.

Let's now take a look at hedge fund activity in other stocks similar to Pentair plc (NYSE:PNR). These stocks are NIO Inc. (NYSE:NIO), Guidewire Software Inc (NYSE:GWRE), Neurocrine Biosciences, Inc. (NASDAQ:NBIX), and Bright Horizons Family Solutions Inc (NYSE:BFAM). All of these stocks' market caps match PNR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NIO,13,65823,-1 GWRE,20,564802,-12 NBIX,37,781900,-2 BFAM,16,279164,0 Average,21.5,422922,-3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $423 million. That figure was $645 million in PNR's case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand NIO Inc. (NYSE:NIO) is the least popular one with only 13 bullish hedge fund positions. Pentair plc (NYSE:PNR) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that the top 15 most popular stocks among hedge funds returned 21.3% year-to-date through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on PNR, 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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