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Is PagSeguro Digital Ltd. (PAGS) Going to Burn These Hedge Funds?

With the second-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the third quarter of 2021. One of these stocks was PagSeguro Digital Ltd. (NYSE:PAGS).

PagSeguro Digital Ltd. (NYSE:PAGS) investors should pay attention to an increase in support from the world’s most elite money managers of late. PagSeguro Digital Ltd. (NYSE:PAGS) was in 40 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 48. Our calculations also showed that PAGS isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 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 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.

Robert Pohly of Samlyn Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 encompassing PagSeguro Digital Ltd. (NYSE:PAGS).

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

At second quarter’s end, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards PAGS over the last 24 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

Among these funds, Sylebra Capital Management held the most valuable stake in PagSeguro Digital Ltd. (NYSE:PAGS), which was worth $513.1 million at the end of the second quarter. On the second spot was Samlyn Capital which amassed $340.6 million worth of shares. Melvin Capital Management, Melvin Capital Management, and Tekne Capital Management 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 Tekne Capital Management allocated the biggest weight to PagSeguro Digital Ltd. (NYSE:PAGS), around 25.84% of its 13F portfolio. Sylebra Capital Management is also relatively very bullish on the stock, designating 12.73 percent of its 13F equity portfolio to PAGS.

As aggregate interest increased, specific money managers have jumped into PagSeguro Digital Ltd. (NYSE:PAGS) headfirst. Palestra Capital Management, managed by Andrew Immerman and Jeremy Schiffman, created the most valuable position in PagSeguro Digital Ltd. (NYSE:PAGS). Palestra Capital Management had $99.7 million invested in the company at the end of the quarter. David Thomas’s Atalan Capital also made a $95.1 million investment in the stock during the quarter. The following funds were also among the new PAGS investors: Jeff Lignelli’s Incline Global Management, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital, and Peter S. Park’s Park West Asset Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as PagSeguro Digital Ltd. (NYSE:PAGS) but similarly valued. We will take a look at Genuine Parts Company (NYSE:GPC), NetApp Inc. (NASDAQ:NTAP), Domino’s Pizza, Inc. (NYSE:DPZ), NVR, Inc. (NYSE:NVR), Healthpeak Properties, Inc. (NYSE:PEAK), Bentley Systems, Incorporated (NASDAQ:BSY), and Boston Properties, Inc. (NYSE:BXP). This group of stocks’ market values resemble PAGS’s market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GPC,29,418026,3 NTAP,31,437722,5 DPZ,31,2494688,2 NVR,28,1093288,-11 PEAK,22,119796,4 BSY,17,81427,-5 BXP,19,1397759,-8 Average,25.3,863244,-1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.3 hedge funds with bullish positions and the average amount invested in these stocks was $863 million. That figure was $2390 million in PAGS’s case. NetApp Inc. (NASDAQ:NTAP) is the most popular stock in this table. On the other hand Bentley Systems, Incorporated (NASDAQ:BSY) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks PagSeguro Digital Ltd. (NYSE:PAGS) is more popular among hedge funds. Our overall hedge fund sentiment score for PAGS is 85. 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. 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 21.8% in 2021 through October 11th and still beat the market by 4.4 percentage points. Unfortunately PAGS wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on PAGS were disappointed as the stock returned -42.1% since the end of the second quarter (through 10/11) 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 since 2019.

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