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Were Hedge Funds Right About Proto Labs Inc (PRLB)?

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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Melvin Capital's recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Proto Labs Inc (NYSE:PRLB).

Proto Labs Inc (NYSE:PRLB) was in 18 hedge funds' portfolios at the end of March. The all time high for this statistic was previously 17. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. PRLB investors should be aware of an increase in hedge fund sentiment in recent months. There were 16 hedge funds in our database with PRLB positions at the end of the fourth quarter. Our calculations also showed that PRLB isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Matthew Hulsizer PEAK6 Capital
Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let's take a look at the key hedge fund action surrounding Proto Labs Inc (NYSE:PRLB).

Do Hedge Funds Think PRLB Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the previous quarter. On the other hand, there were a total of 13 hedge funds with a bullish position in PRLB a year ago. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Is PRLB A Good Stock To Buy?
Is PRLB A Good Stock To Buy?

According to Insider Monkey's hedge fund database, ARK Investment Management, managed by Catherine D. Wood, holds the largest position in Proto Labs Inc (NYSE:PRLB). ARK Investment Management has a $445 million position in the stock, comprising 0.9% of its 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, managed by Ken Griffin, which holds a $14.9 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining professional money managers that hold long positions include Israel Englander's Millennium Management, John Overdeck and David Siegel's Two Sigma Advisors and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position ARK Investment Management allocated the biggest weight to Proto Labs Inc (NYSE:PRLB), around 0.88% of its 13F portfolio. Motley Fool Asset Management is also relatively very bullish on the stock, designating 0.5 percent of its 13F equity portfolio to PRLB.

As industrywide interest jumped, some big names have been driving this bullishness. Two Sigma Advisors, managed by John Overdeck and David Siegel, assembled the most outsized position in Proto Labs Inc (NYSE:PRLB). Two Sigma Advisors had $8.1 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $7.1 million position during the quarter. The other funds with brand new PRLB positions are Dmitry Balyasny's Balyasny Asset Management, D. E. Shaw's D E Shaw, and Alan Howard's Brevan Howard.

Let's check out hedge fund activity in other stocks similar to Proto Labs Inc (NYSE:PRLB). These stocks are Atkore International Group Inc. (NYSE:ATKR), Insight Enterprises, Inc. (NASDAQ:NSIT), PagerDuty, Inc. (NYSE:PD), Kennametal Inc. (NYSE:KMT), Merit Medical Systems, Inc. (NASDAQ:MMSI), Fabrinet (NYSE:FN), and PTC Therapeutics, Inc. (NASDAQ:PTCT). This group of stocks' market valuations match PRLB's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATKR,21,174415,-1 NSIT,17,208588,-2 PD,24,676304,-2 KMT,13,349737,-1 MMSI,18,350008,-2 FN,15,100470,2 PTCT,24,231769,1 Average,18.9,298756,-0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.9 hedge funds with bullish positions and the average amount invested in these stocks was $299 million. That figure was $515 million in PRLB's case. PagerDuty, Inc. (NYSE:PD) is the most popular stock in this table. On the other hand Kennametal Inc. (NYSE:KMT) is the least popular one with only 13 bullish hedge fund positions. Proto Labs Inc (NYSE:PRLB) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PRLB is 59.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately PRLB wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); PRLB investors were disappointed as the stock returned -29.1% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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