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 Dana Incorporated (NYSE:DAN) and determine whether hedge funds had an edge regarding this stock.
Dana Incorporated (NYSE:DAN) investors should be aware of a decrease in enthusiasm from smart money lately. Dana Incorporated (NYSE:DAN) was in 25 hedge funds' portfolios at the end of June. The all time high for this statistics is 28. Our calculations also showed that DAN isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
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 56 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Richard S. Pzena of Pzena Investment Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind we're going to check out the key hedge fund action surrounding Dana Incorporated (NYSE:DAN).
What does smart money think about Dana Incorporated (NYSE:DAN)?
At Q2's end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. On the other hand, there were a total of 25 hedge funds with a bullish position in DAN a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
According to Insider Monkey's hedge fund database, GAMCO Investors, managed by Mario Gabelli, holds the number one position in Dana Incorporated (NYSE:DAN). GAMCO Investors has a $39.3 million position in the stock, comprising 0.4% of its 13F portfolio. The second most bullish fund manager is Richard S. Pzena of Pzena Investment Management, with a $39 million position; 0.3% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish contain Ken Griffin's Citadel Investment Group, Cliff Asness's AQR Capital Management and Dmitry Balyasny's Balyasny Asset Management. In terms of the portfolio weights assigned to each position Glendon Capital Management allocated the biggest weight to Dana Incorporated (NYSE:DAN), around 3.29% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, dishing out 1.1 percent of its 13F equity portfolio to DAN.
Due to the fact that Dana Incorporated (NYSE:DAN) has experienced bearish sentiment from the smart money, it's easy to see that there is a sect of funds that elected to cut their positions entirely by the end of the second quarter. Interestingly, Phill Gross and Robert Atchinson's Adage Capital Management cut the biggest position of all the hedgies watched by Insider Monkey, comprising about $8.5 million in stock. Steve Cohen's fund, Point72 Asset Management, also said goodbye to its stock, about $1.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 3 funds by the end of the second quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Dana Incorporated (NYSE:DAN) but similarly valued. We will take a look at Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA), Sunstone Hotel Investors Inc (NYSE:SHO), WESCO International, Inc. (NYSE:WCC), Euronav NV (NYSE:EURN), PennyMac Mortgage Investment Trust (NYSE:PMT), Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL), and Moog Inc (NASDAQ:MOG). This group of stocks' market values are closest to DAN's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IBA,3,30135,0 SHO,23,179765,4 WCC,34,503674,2 EURN,17,93347,-16 PMT,15,124808,3 MDGL,15,435642,0 MOG,23,81342,3 Average,18.6,206959,-0.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.6 hedge funds with bullish positions and the average amount invested in these stocks was $207 million. That figure was $186 million in DAN's case. WESCO International, Inc. (NYSE:WCC) is the most popular stock in this table. On the other hand Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) is the least popular one with only 3 bullish hedge fund positions. Dana Incorporated (NYSE:DAN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DAN is 64.3. 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 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately DAN wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DAN were disappointed as the stock returned -5.2% 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.