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Did Hedge Funds Make The Right Call On Douglas Emmett, Inc. (DEI)?

Abigail Fisher

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 Douglas Emmett, Inc. (NYSE:DEI) and determine whether hedge funds skillfully traded this stock.

Douglas Emmett, Inc. (NYSE:DEI) has experienced an increase in support from the world's most elite money managers lately. DEI was in 22 hedge funds' portfolios at the end of the first quarter of 2020. There were 19 hedge funds in our database with DEI holdings at the end of the previous quarter. Our calculations also showed that DEI 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.

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 was 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_758429" align="aligncenter" width="385"] Ric Dillon of Diamond Hill Capital[/caption]

Ric Dillon Diamond Hill Capital
Ric Dillon Diamond Hill Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. 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 if you have any good ideas send us an email. Now we're going to analyze the fresh hedge fund action encompassing Douglas Emmett, Inc. (NYSE:DEI).

How have hedgies been trading Douglas Emmett, Inc. (NYSE:DEI)?

Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in DEI a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Among these funds, Zimmer Partners held the most valuable stake in Douglas Emmett, Inc. (NYSE:DEI), which was worth $192.1 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $118.5 million worth of shares. Citadel Investment Group, Diamond Hill Capital, and Marshall Wace LLP 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 Zimmer Partners allocated the biggest weight to Douglas Emmett, Inc. (NYSE:DEI), around 4.26% of its 13F portfolio. EMS Capital is also relatively very bullish on the stock, dishing out 0.69 percent of its 13F equity portfolio to DEI.

With a general bullishness amongst the heavyweights, some big names were leading the bulls' herd. Diamond Hill Capital, managed by Ric Dillon, assembled the most outsized position in Douglas Emmett, Inc. (NYSE:DEI). Diamond Hill Capital had $41.2 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace LLP also initiated a $32.8 million position during the quarter. The other funds with new positions in the stock are Edmond M. Safra's EMS Capital, Paul Tudor Jones's Tudor Investment Corp, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Douglas Emmett, Inc. (NYSE:DEI) but similarly valued. These stocks are China Southern Airlines Co Ltd (NYSE:ZNH), James Hardie Industries plc (NYSE:JHX), News Corp (NASDAQ:NWS), and CACI International Inc (NYSE:CACI). This group of stocks' market values are closest to DEI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZNH,2,7964,-1 JHX,4,6976,1 NWS,13,28126,6 CACI,25,321834,1 Average,11,91225,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $526 million in DEI's case. CACI International Inc (NYSE:CACI) is the most popular stock in this table. On the other hand China Southern Airlines Co Ltd (NYSE:ZNH) is the least popular one with only 2 bullish hedge fund positions. Douglas Emmett, Inc. (NYSE:DEI) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately DEI wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DEI were disappointed as the stock returned 1.4% 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.

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