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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Domino's Pizza, Inc. (NYSE:DPZ)? The smart money sentiment can provide an answer to this question.
Domino's Pizza, Inc. (NYSE:DPZ) has seen a decrease in support from the world's most elite money managers recently. Domino's Pizza, Inc. (NYSE:DPZ) was in 29 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 47. There were 37 hedge funds in our database with DPZ positions at the end of the fourth quarter. Our calculations also showed that DPZ isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
David Harding of Winton Capital Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we're going to analyze the fresh hedge fund action surrounding Domino's Pizza, Inc. (NYSE:DPZ).
Do Hedge Funds Think DPZ Is A Good Stock To Buy Now?
At Q1's end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in DPZ over the last 23 quarters. With hedge funds' sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in Domino's Pizza, Inc. (NYSE:DPZ) was held by Pershing Square, which reported holding $748.7 million worth of stock at the end of December. It was followed by Soroban Capital Partners with a $409.4 million position. Other investors bullish on the company included Renaissance Technologies, Arrowstreet Capital, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Pershing Square allocated the biggest weight to Domino's Pizza, Inc. (NYSE:DPZ), around 7.16% of its 13F portfolio. Soroban Capital Partners is also relatively very bullish on the stock, dishing out 3.5 percent of its 13F equity portfolio to DPZ.
Because Domino's Pizza, Inc. (NYSE:DPZ) has witnessed a decline in interest from hedge fund managers, we can see that there exists a select few money managers who were dropping their full holdings in the first quarter. At the top of the heap, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors sold off the largest investment of all the hedgies monitored by Insider Monkey, valued at about $21.6 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also cut its stock, about $15.7 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 8 funds in the first quarter.
Let's go over hedge fund activity in other stocks similar to Domino's Pizza, Inc. (NYSE:DPZ). These stocks are Fair Isaac Corporation (NYSE:FICO), Equitable Holdings, Inc. (NYSE:EQH), argenx SE (NASDAQ:ARGX), Agnico Eagle Mines Limited (NYSE:AEM), DENTSPLY SIRONA Inc. (NASDAQ:XRAY), Sociedad Quimica y Minera (NYSE:SQM), and Howmet Aerospace Inc. (NYSE:HWM). This group of stocks' market values are similar to DPZ's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FICO,27,1355293,-11 EQH,44,1699164,-2 ARGX,27,1375874,5 AEM,28,247180,-8 XRAY,26,1218918,-2 SQM,16,142465,2 HWM,51,3959776,2 Average,31.3,1428381,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.3 hedge funds with bullish positions and the average amount invested in these stocks was $1428 million. That figure was $2176 million in DPZ's case. Howmet Aerospace Inc. (NYSE:HWM) is the most popular stock in this table. On the other hand Sociedad Quimica y Minera (NYSE:SQM) is the least popular one with only 16 bullish hedge fund positions. Domino's Pizza, Inc. (NYSE:DPZ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DPZ is 34.1. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.8% in 2021 through July 2nd and still beat the market by 6 percentage points. A small number of hedge funds were also right about betting on DPZ as the stock returned 29.2% since the end of the first quarter (through 7/2) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.