PNC Financial Services Group, Inc. (PNC): Hedge Funds In Wait-and-See Mode

Nina Todic

Wed, Oct 9, 2019, 6:31 PM

There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don't cover. Because of Carl Icahn and other elite funds' exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze The PNC Financial Services Group, Inc. (NYSE:PNC).

The PNC Financial Services Group, Inc. (NYSE:PNC) has seen a decrease in hedge fund sentiment recently. Our calculations also showed that PNC isn't among the 30 most popular stocks among hedge funds (see the video below).

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 40 percentage points since May 2014 through May 30, 2019 (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.

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a peek at the key hedge fund action regarding The PNC Financial Services Group, Inc. (NYSE:PNC).

What have hedge funds been doing with The PNC Financial Services Group, Inc. (NYSE:PNC)?

At the end of the second quarter, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the first quarter of 2019. On the other hand, there were a total of 40 hedge funds with a bullish position in PNC a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the biggest position in The PNC Financial Services Group, Inc. (NYSE:PNC). Berkshire Hathaway has a $1.1904 billion position in the stock, comprising 0.6% of its 13F portfolio. The second most bullish fund manager is Citadel Investment Group, led by Ken Griffin, holding a $378.3 million position; 0.2% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism contain Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Phill Gross and Robert Atchinson's Adage Capital Management and Ric Dillon's Diamond Hill Capital.

Since The PNC Financial Services Group, Inc. (NYSE:PNC) has experienced bearish sentiment from the smart money, it's safe to say that there exists a select few funds that decided to sell off their full holdings in the second quarter. At the top of the heap, Steve Cohen's Point72 Asset Management dropped the largest investment of the 750 funds tracked by Insider Monkey, totaling about $86.5 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also sold off its stock, about $22.6 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 2 funds in the second quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as The PNC Financial Services Group, Inc. (NYSE:PNC) but similarly valued. These stocks are Colgate-Palmolive Company (NYSE:CL), Dominion Energy, Inc. (NYSE:D), Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG), and CIGNA Corporation (NYSE:CI). This group of stocks' market valuations match PNC's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CL,42,1858275,0 D,39,1228250,3 MUFG,12,65234,-2 CI,48,2664032,1 Average,35.25,1453948,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $1454 million. That figure was $2671 million in PNC's case. CIGNA Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Mitsubishi UFJ Financial Group, Inc. (NYSE:MUFG) is the least popular one with only 12 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on PNC, though not to the same extent, as the stock returned 2.9% during the third quarter and outperformed the market as well.