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Were Hedge Funds Right About Souring On The PNC Financial Services Group (PNC)?

Abigail Fisher

How do you pick the next stock to invest in? One way would be to spend days 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 The PNC Financial Services Group Inc. (NYSE:PNC) and determine whether hedge funds had an edge regarding this stock.

Is The PNC Financial Services Group Inc. (NYSE:PNC) undervalued? The smart money was selling. The number of long hedge fund bets retreated by 2 in recent months. Our calculations also showed that PNC isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_671150" align="aligncenter" width="394"] Warren Buffett of Berkshire Hathaway[/caption]

Warren Buffett

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to take a glance at the key hedge fund action regarding The PNC Financial Services Group Inc. (NYSE:PNC).

Hedge fund activity in The PNC Financial Services Group Inc. (NYSE:PNC)

At the end of the first quarter, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PNC over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Berkshire Hathaway held the most valuable stake in The PNC Financial Services Group Inc. (NYSE:PNC), which was worth $880.4 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $114.7 million worth of shares. Arrowstreet Capital, Adage Capital Management, and GAMCO Investors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Gillson Capital allocated the biggest weight to The PNC Financial Services Group Inc. (NYSE:PNC), around 3.8% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, setting aside 2.48 percent of its 13F equity portfolio to PNC.

Since The PNC Financial Services Group Inc. (NYSE:PNC) has experienced falling interest from hedge fund managers, it's safe to say that there was a specific group of hedgies that slashed their positions entirely by the end of the first quarter. Interestingly, Dmitry Balyasny's Balyasny Asset Management sold off the biggest stake of the "upper crust" of funds followed by Insider Monkey, totaling an estimated $126.3 million in stock. Stanley Druckenmiller's fund, Duquesne Capital, also sold off its stock, about $47.3 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 2 funds by the end of the first quarter.

Let's also examine hedge fund activity in other stocks similar to The PNC Financial Services Group Inc. (NYSE:PNC). We will take a look at NetEase, Inc (NASDAQ:NTES), National Grid plc (NYSE:NGG), Zoom Video Communications, Inc. (NASDAQ:ZM), and Walgreens Boots Alliance Inc (NASDAQ:WBA). All of these stocks' market caps resemble PNC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NTES,39,3286243,-5 NGG,6,435493,0 ZM,47,2383850,19 WBA,45,461497,7 Average,34.25,1641771,5.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.25 hedge funds with bullish positions and the average amount invested in these stocks was $1642 million. That figure was $1264 million in PNC's case. Zoom Video Communications, Inc. (NASDAQ:ZM) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. The PNC Financial Services Group Inc. (NYSE:PNC) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately PNC wasn't nearly as popular as these 10 stocks and hedge funds that were betting on PNC were disappointed as the stock returned 11.2% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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