Is ProPetro Holding Corp. (PUMP) A Good Stock To Buy?

Abigail Fisher

Updated Fri, Dec 14, 2018, 8:08 PM

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2014) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like ProPetro Holding Corp. (NYSE:PUMP).

ProPetro Holding Corp. (NYSE:PUMP) investors should be aware of an increase in activity from the world's largest hedge funds lately. PUMP was in 21 hedge funds' portfolios at the end of September. There were 16 hedge funds in our database with PUMP positions at the end of the previous quarter. Our calculations also showed that PUMP 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 18 percentage points since May 2014 through December 3, 2018 (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.

We're going to review the new hedge fund action surrounding ProPetro Holding Corp. (NYSE:PUMP).

How are hedge funds trading ProPetro Holding Corp. (NYSE:PUMP)?

At Q3's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 31% from the second quarter of 2018. By comparison, 17 hedge funds held shares or bullish call options in PUMP heading into this year. With hedge funds' capital changing hands, there exists a select group of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Among these funds, Millennium Management held the most valuable stake in ProPetro Holding Corp. (NYSE:PUMP), which was worth $80.6 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $31.1 million worth of shares. Moreover, Adage Capital Management, Encompass Capital Advisors, and Point72 Asset Management were also bullish on ProPetro Holding Corp. (NYSE:PUMP), allocating a large percentage of their portfolios to this stock.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Point72 Asset Management, managed by Steve Cohen, initiated the most valuable position in ProPetro Holding Corp. (NYSE:PUMP). Point72 Asset Management had $14.2 million invested in the company at the end of the quarter. Jonathan Barrett and Paul Segal's Luminus Management also made a $3.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Larry Foley and Paul Farrell's Bronson Point Partners, Malcolm Fairbairn's Ascend Capital, and David Costen Haley's HBK Investments.

Let's now take a look at hedge fund activity in other stocks similar to ProPetro Holding Corp. (NYSE:PUMP). We will take a look at Seacoast Banking Corporation of Florida (NASDAQ:SBCF), Sunrun Inc (NASDAQ:RUN), Five Point Holdings, LLC (NYSE:FPH), and 1st Source Corporation (NASDAQ:SRCE). All of these stocks' market caps are closest to PUMP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SBCF,9,48108,-3 RUN,8,237812,-1 FPH,12,294359,-2 SRCE,8,28210,1 Average,9.25,152122,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.25 hedge funds with bullish positions and the average amount invested in these stocks was $152 million. That figure was $217 million in PUMP's case. Five Point Holdings, LLC (NYSE:FPH) is the most popular stock in this table. On the other hand Sunrun Inc (NASDAQ:RUN) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks ProPetro Holding Corp. (NYSE:PUMP) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

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

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