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 Discovery Inc. (NASDAQ:DISCA) and determine whether hedge funds had an edge regarding this stock.
Discovery Inc. (NASDAQ:DISCA) has seen a decrease in hedge fund sentiment in recent months. Discovery Inc. (NASDAQ:DISCA) was in 29 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. There were 32 hedge funds in our database with DISCA holdings at the end of March. Our calculations also showed that DISCA 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.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Bill Miller of Miller Value Partners
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind we're going to review the key hedge fund action regarding Discovery Inc. (NASDAQ:DISCA).
What does smart money think about Discovery Inc. (NASDAQ:DISCA)?
Heading into the third quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DISCA over the last 20 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
Among these funds, Citadel Investment Group held the most valuable stake in Discovery Inc. (NASDAQ:DISCA), which was worth $94.3 million at the end of the third quarter. On the second spot was Miller Value Partners which amassed $30.5 million worth of shares. Balyasny Asset Management, GAMCO Investors, and Quaker Capital Investments 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 Quaker Capital Investments allocated the biggest weight to Discovery Inc. (NASDAQ:DISCA), around 8.9% of its 13F portfolio. Scion Asset Management is also relatively very bullish on the stock, designating 3.35 percent of its 13F equity portfolio to DISCA.
Because Discovery Inc. (NASDAQ:DISCA) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds that slashed their entire stakes last quarter. At the top of the heap, Michael Rockefeller and KarláKroeker's Woodline Partners sold off the biggest investment of the "upper crust" of funds monitored by Insider Monkey, totaling close to $7 million in stock, and Jeremy Hosking's Hosking Partners was right behind this move, as the fund dropped about $5.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 3 funds last quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Discovery Inc. (NASDAQ:DISCA) but similarly valued. We will take a look at Concho Resources Inc. (NYSE:CXO), Lyft, Inc. (NASDAQ:LYFT), Zendesk Inc (NYSE:ZEN), Bio-Techne Corporation (NASDAQ:TECH), United Airlines Holdings Inc (NASDAQ:UAL), Erie Indemnity Company (NASDAQ:ERIE), and Medical Properties Trust, Inc. (NYSE:MPW). This group of stocks' market valuations resemble DISCA's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CXO,44,963633,13 LYFT,30,324369,-1 ZEN,63,1579039,8 TECH,27,278924,1 UAL,38,917094,-3 ERIE,14,42805,-3 MPW,17,162185,1 Average,33.3,609721,2.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $610 million. That figure was $276 million in DISCA's case. Zendesk Inc (NYSE:ZEN) is the most popular stock in this table. On the other hand Erie Indemnity Company (NASDAQ:ERIE) is the least popular one with only 14 bullish hedge fund positions. Discovery Inc. (NASDAQ:DISCA) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DISCA is 40.2. 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. 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 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. A small number of hedge funds were also right about betting on DISCA as the stock returned 12.7% since the end of June (through September 14th) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.