While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Dorchester Minerals LP (NASDAQ:DMLP).
Hedge fund interest in Dorchester Minerals LP (NASDAQ:DMLP) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare DMLP to other stocks including Valhi, Inc. (NYSE:VHI), DMC Global Inc. (NASDAQ:BOOM), and Preferred Apartment Communities Inc. (NYSE:APTS) to get a better sense of its popularity. 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 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 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.
[caption id="attachment_193003" align="alignnone" width="600"] Chuck Royce of Royce & Associates[/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. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's review the recent hedge fund action surrounding Dorchester Minerals LP (NASDAQ:DMLP).
Hedge fund activity in Dorchester Minerals LP (NASDAQ:DMLP)
At Q3's end, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2019. By comparison, 6 hedge funds held shares or bullish call options in DMLP a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Horizon Asset Management, managed by Murray Stahl, holds the number one position in Dorchester Minerals LP (NASDAQ:DMLP). Horizon Asset Management has a $14.3 million position in the stock, comprising 0.4% of its 13F portfolio. On Horizon Asset Management's heels is Royce & Associates, led by Chuck Royce, holding a $13 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism include John R. Wagner's SCW Capital Management, Charles Davidson and Joseph Jacobs's Wexford Capital and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital. In terms of the portfolio weights assigned to each position SCW Capital Management allocated the biggest weight to Dorchester Minerals LP (NASDAQ:DMLP), around 5.92% of its 13F portfolio. Lucas Capital Management is also relatively very bullish on the stock, dishing out 0.76 percent of its 13F equity portfolio to DMLP.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Dorchester Minerals LP (NASDAQ:DMLP) but similarly valued. These stocks are Valhi, Inc. (NYSE:VHI), DMC Global Inc. (NASDAQ:BOOM), Preferred Apartment Communities Inc. (NYSE:APTS), and Ribbon Communications Inc. (NASDAQ:RBBN). All of these stocks' market caps are similar to DMLP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VHI,6,4788,0 BOOM,22,92343,2 APTS,6,9024,-1 RBBN,17,46957,6 Average,12.75,38278,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $40 million in DMLP's case. DMC Global Inc. (NASDAQ:BOOM) is the most popular stock in this table. On the other hand Valhi, Inc. (NYSE:VHI) is the least popular one with only 6 bullish hedge fund positions. Dorchester Minerals LP (NASDAQ:DMLP) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately DMLP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DMLP investors were disappointed as the stock returned -4.2% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.