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Should I Avoid DraftKings Inc. (DKNG)?

·6 min read

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on March 31st. We at Insider Monkey have made an extensive database of more than 866 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded DraftKings Inc. (NASDAQ:DKNG) based on those filings.

DraftKings Inc. (NASDAQ:DKNG) investors should be aware of a decrease in hedge fund sentiment recently. DraftKings Inc. (NASDAQ:DKNG) was in 43 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 53. Our calculations also showed that DKNG 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.

Peter Rathjens Arrowstreet Capital 394
Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation, which is why we are checking out this inflation play. We go through lists like 10 best gold stocks to buy to identify promising stocks. 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. Now we're going to check out the new hedge fund action encompassing DraftKings Inc. (NASDAQ:DKNG).

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

At Q1's end, a total of 43 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DKNG over the last 23 quarters. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Is DKNG A Good Stock To Buy?
Is DKNG A Good Stock To Buy?

Among these funds, ARK Investment Management held the most valuable stake in DraftKings Inc. (NASDAQ:DKNG), which was worth $268.3 million at the end of the fourth quarter. On the second spot was Arrowstreet Capital which amassed $211.3 million worth of shares. Tybourne Capital Management, CaaS Capital, and Granger 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 Granger Management allocated the biggest weight to DraftKings Inc. (NASDAQ:DKNG), around 8.43% of its 13F portfolio. Diker Management is also relatively very bullish on the stock, earmarking 5.03 percent of its 13F equity portfolio to DKNG.

Seeing as DraftKings Inc. (NASDAQ:DKNG) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that slashed their positions entirely last quarter. It's worth mentioning that Principal Global Investors's Columbus Circle Investors dumped the largest position of the "upper crust" of funds watched by Insider Monkey, totaling close to $12.1 million in stock. Warren Lammert's fund, Granite Point Capital, also dumped its stock, about $8.6 million worth. These moves are interesting, as total hedge fund interest was cut by 5 funds last quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as DraftKings Inc. (NASDAQ:DKNG) but similarly valued. We will take a look at Arthur J. Gallagher & Co. (NYSE:AJG), Nasdaq, Inc. (NASDAQ:NDAQ), The Clorox Company (NYSE:CLX), AmerisourceBergen Corporation (NYSE:ABC), ZTO Express (Cayman) Inc. (NYSE:ZTO), New Oriental Education & Technology Group Inc. (NYSE:EDU), and Kansas City Southern (NYSE:KSU). All of these stocks' market caps match DKNG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AJG,24,283959,0 NDAQ,22,236137,-5 CLX,38,1195544,-1 ABC,43,1177164,-4 ZTO,15,659779,-2 EDU,45,2187946,2 KSU,49,1662353,0 Average,33.7,1057555,-1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.7 hedge funds with bullish positions and the average amount invested in these stocks was $1058 million. That figure was $966 million in DKNG's case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 15 bullish hedge fund positions. DraftKings Inc. (NASDAQ:DKNG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DKNG is 65.5. 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 positive signal but 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 17.4% in 2021 through June 18th and beat the market again by 6.1 percentage points. Unfortunately DKNG wasn't nearly as popular as these 5 stocks and hedge funds that were betting on DKNG were disappointed as the stock returned -21.6% since the end of March (through 6/18) 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 many of these stocks already outperformed the market since 2019.

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