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Is Diamond Offshore Drilling Inc (DO) Going To Burn These Hedge Funds ?

The 700+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the second quarter, which unveil their equity positions as of June 28. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Diamond Offshore Drilling Inc (NYSE:DO).

Diamond Offshore Drilling Inc (NYSE:DO) investors should pay attention to a decrease in hedge fund sentiment in recent months. DO was in 13 hedge funds' portfolios at the end of June. There were 18 hedge funds in our database with DO positions at the end of the previous quarter. Our calculations also showed that DO isn't among the 30 most popular stocks among hedge funds (see the video below).

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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.

DO_oct2019
DO_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. We're going to view the fresh hedge fund action encompassing Diamond Offshore Drilling Inc (NYSE:DO).

How are hedge funds trading Diamond Offshore Drilling Inc (NYSE:DO)?

At the end of the second quarter, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DO over the last 16 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

CITADEL INVESTMENT GROUP
CITADEL INVESTMENT GROUP

Of the funds tracked by Insider Monkey, Orbis Investment Management, managed by William B. Gray, holds the most valuable position in Diamond Offshore Drilling Inc (NYSE:DO). Orbis Investment Management has a $29.6 million position in the stock, comprising 0.2% of its 13F portfolio. Sitting at the No. 2 spot is Ken Fisher of Fisher Asset Management, with a $17.3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions comprise Till Bechtolsheimer's Arosa Capital Management, Dmitry Balyasny's Balyasny Asset Management and Ken Griffin's Citadel Investment Group.

Judging by the fact that Diamond Offshore Drilling Inc (NYSE:DO) has witnessed a decline in interest from the smart money, we can see that there lies a certain "tier" of fund managers who sold off their entire stakes in the second quarter. It's worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the largest investment of the 750 funds watched by Insider Monkey, valued at an estimated $7.8 million in stock, and John Thiessen's Vertex One Asset Management was right behind this move, as the fund dumped about $2.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 5 funds in the second quarter.

Let's go over hedge fund activity in other stocks similar to Diamond Offshore Drilling Inc (NYSE:DO). These stocks are Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA), Atkore International Group Inc. (NYSE:ATKR), Harmony Gold Mining Company Limited (NYSE:HMY), and Intrexon Corp (NASDAQ:XON). This group of stocks' market caps match DO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNTA,19,181200,1 ATKR,17,90536,-2 HMY,10,40696,1 XON,10,82829,2 Average,14,98815,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $99 million. That figure was $64 million in DO's case. Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA) is the most popular stock in this table. On the other hand Harmony Gold Mining Company Limited (NYSE:HMY) is the least popular one with only 10 bullish hedge fund positions. Diamond Offshore Drilling Inc (NYSE:DO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately DO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DO investors were disappointed as the stock returned -37.3% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.

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

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