It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Dolby Laboratories, Inc. (NYSE:DLB).
Hedge fund interest in Dolby Laboratories, Inc. (NYSE:DLB) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as HD Supply Holdings Inc (NASDAQ:HDS), Charles River Laboratories International Inc. (NYSE:CRL), and East West Bancorp, Inc. (NASDAQ:EWBC) to gather more data points. Our calculations also showed that DLB isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_26073" align="aligncenter" width="450"] Jim Simons of Renaissance Technologies[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind we're going to take a look at the key hedge fund action encompassing Dolby Laboratories, Inc. (NYSE:DLB).
Hedge fund activity in Dolby Laboratories, Inc. (NYSE:DLB)
At Q3's end, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in DLB a year ago. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Dolby Laboratories, Inc. (NYSE:DLB), which was worth $156 million at the end of the third quarter. On the second spot was Polar Capital which amassed $115.2 million worth of shares. MFP Investors, Nantahala Capital Management, and Woodson Capital Management 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 BeaconLight Capital allocated the biggest weight to Dolby Laboratories, Inc. (NYSE:DLB), around 7.46% of its 13F portfolio. Alta Park Capital is also relatively very bullish on the stock, setting aside 7.29 percent of its 13F equity portfolio to DLB.
Judging by the fact that Dolby Laboratories, Inc. (NYSE:DLB) has faced falling interest from the smart money, it's safe to say that there exists a select few funds that decided to sell off their positions entirely by the end of the third quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management said goodbye to the biggest stake of all the hedgies watched by Insider Monkey, valued at about $1 million in stock, and Minhua Zhang's Weld Capital Management was right behind this move, as the fund cut about $0.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Dolby Laboratories, Inc. (NYSE:DLB) but similarly valued. These stocks are HD Supply Holdings Inc (NASDAQ:HDS), Charles River Laboratories International Inc. (NYSE:CRL), East West Bancorp, Inc. (NASDAQ:EWBC), and Watsco Inc (NYSE:WSO). This group of stocks' market values match DLB's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HDS,33,965472,3 CRL,32,875494,3 EWBC,27,426545,-1 WSO,18,138904,-4 Average,27.5,601604,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $602 million. That figure was $539 million in DLB's case. HD Supply Holdings Inc (NASDAQ:HDS) is the most popular stock in this table. On the other hand Watsco Inc (NYSE:WSO) is the least popular one with only 18 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. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately DLB wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DLB investors were disappointed as the stock returned 12.6% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.