How do you pick the next stock to invest in? One way would be to spend hours 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 Dorchester Minerals LP (NASDAQ:DMLP).
Is Dorchester Minerals LP (NASDAQ:DMLP) the right pick for your portfolio? Money managers are reducing their bets on the stock. The number of long hedge fund positions fell by 2 in recent months. Our calculations also showed that DMLP isn't among the 30 most popular stocks among hedge funds. DMLP was in 6 hedge funds' portfolios at the end of the third quarter of 2018. There were 8 hedge funds in our database with DMLP positions at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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.
We're going to go over the latest hedge fund action regarding Dorchester Minerals LP (NASDAQ:DMLP).
What does the smart money think about Dorchester Minerals LP (NASDAQ:DMLP)?
At Q3's end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of -25% from one quarter earlier. By comparison, 5 hedge funds held shares or bullish call options in DMLP heading into this year. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Royce & Associates was the largest shareholder of Dorchester Minerals LP (NASDAQ:DMLP), with a stake worth $14.3 million reported as of the end of September. Trailing Royce & Associates was Arrowstreet Capital, which amassed a stake valued at $4.1 million. Wexford Capital, Renaissance Technologies, and Lucas Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Since Dorchester Minerals LP (NASDAQ:DMLP) has experienced declining sentiment from hedge fund managers, it's easy to see that there lies a certain "tier" of hedgies who sold off their positions entirely by the end of the third quarter. Intriguingly, Bryant Regan's Lafitte Capital Management dropped the biggest position of the "upper crust" of funds tracked by Insider Monkey, valued at about $13.4 million in stock, and Murray Stahl's Horizon Asset Management was right behind this move, as the fund said goodbye to about $0.9 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds by the end of the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Dorchester Minerals LP (NASDAQ:DMLP). We will take a look at CymaBay Therapeutics Inc (NASDAQ:CBAY), Materialise NV (NASDAQ:MTLS), McEwen Mining Inc (NYSE:MUX), and Victory Capital Holdings, Inc. (NASDAQ:VCTR). This group of stocks' market valuations are similar to DMLP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CBAY,23,225670,3 MTLS,4,12495,1 MUX,5,7411,-1 VCTR,10,38211,3 Average,10.5,70947,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.5 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $25 million in DMLP's case. CymaBay Therapeutics Inc (NASDAQ:CBAY) is the most popular stock in this table. On the other hand Materialise NV (NASDAQ:MTLS) is the least popular one with only 4 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. In this regard CBAY might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.