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We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Dolby Laboratories, Inc. (NYSE:DLB) and determine whether hedge funds skillfully traded this stock.
Dolby Laboratories, Inc. (NYSE:DLB) was in 29 hedge funds' portfolios at the end of the first quarter of 2020. DLB has seen a decrease in support from the world's most elite money managers of late. There were 31 hedge funds in our database with DLB positions at the end of the previous quarter. Our calculations also showed that DLB isn't among the 30 most popular stocks among hedge funds (click for Q1 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 58 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.
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Peter Rathjens of Arrowstreet Capital[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind let's take a look at the key hedge fund action regarding Dolby Laboratories, Inc. (NYSE:DLB).
How have hedgies been trading Dolby Laboratories, Inc. (NYSE:DLB)?
At the end of the first quarter, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in DLB a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies, holds the most valuable position in Dolby Laboratories, Inc. (NYSE:DLB). Renaissance Technologies has a $109.8 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is Nantahala Capital Management, led by Wilmot B. Harkey and Daniel Mack, holding a $45.4 million position; the fund has 1.7% of its 13F portfolio invested in the stock. Other peers that are bullish include Ed Bosek's BeaconLight Capital, Brian Ashford-Russell and Tim Woolley's Polar Capital and Michael Price's MFP Investors. In terms of the portfolio weights assigned to each position BeaconLight Capital allocated the biggest weight to Dolby Laboratories, Inc. (NYSE:DLB), around 8.3% of its 13F portfolio. Trigran Investments is also relatively very bullish on the stock, dishing out 6.22 percent of its 13F equity portfolio to DLB.
Due to the fact that Dolby Laboratories, Inc. (NYSE:DLB) has faced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there exists a select few fund managers that elected to cut their entire stakes heading into Q4. Intriguingly, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali's Alta Park Capital dropped the biggest stake of the 750 funds watched by Insider Monkey, totaling an estimated $26.7 million in stock. Donald Sussman's fund, Paloma Partners, also cut its stock, about $3.2 million worth. These moves are interesting, as total hedge fund interest was cut by 2 funds heading into Q4.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Dolby Laboratories, Inc. (NYSE:DLB) but similarly valued. These stocks are Bausch Health Companies (NYSE:BHC), Mohawk Industries, Inc. (NYSE:MHK), Ally Financial Inc (NYSE:ALLY), and Whirlpool Corporation (NYSE:WHR). This group of stocks' market valuations match DLB's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BHC,35,1566790,4 MHK,36,585591,-4 ALLY,45,931554,-9 WHR,25,567352,-3 Average,35.25,912822,-3 [/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 $913 million. That figure was $374 million in DLB's case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Whirlpool Corporation (NYSE:WHR) is the least popular one with only 25 bullish hedge fund positions. Dolby Laboratories, Inc. (NYSE:DLB) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on DLB, though not to the same extent, as the stock returned 22% during the second quarter and outperformed the market.
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Disclosure: None. This article was originally published at Insider Monkey.