In this article you are going to find out whether hedge funds think Daqo New Energy Corp (NYSE:DQ) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Daqo New Energy Corp (NYSE:DQ) a healthy stock for your portfolio? Hedge funds are turning bullish. The number of long hedge fund positions moved up by 1 recently. Our calculations also showed that DQ isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). DQ was in 15 hedge funds' portfolios at the end of the first quarter of 2020. There were 14 hedge funds in our database with DQ holdings at the end of the previous quarter. 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 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 58 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 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_26255" align="aligncenter" width="400"] Louis Navellier of Navellier & Associates[/caption]
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology's influence will go beyond online payments. So, we are checking out this futurist's moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let's analyze the latest hedge fund action regarding Daqo New Energy Corp (NYSE:DQ).
How have hedgies been trading Daqo New Energy Corp (NYSE:DQ)?
Heading into the second quarter of 2020, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DQ over the last 18 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Millennium Management held the most valuable stake in Daqo New Energy Corp (NYSE:DQ), which was worth $17.4 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $8 million worth of shares. Sensato Capital Management, Arrowstreet Capital, and Sandbar Asset 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 Sensato Capital Management allocated the biggest weight to Daqo New Energy Corp (NYSE:DQ), around 3.72% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, designating 1.86 percent of its 13F equity portfolio to DQ.
As industrywide interest jumped, specific money managers were leading the bulls' herd. Kadensa Capital, managed by Leung Chi Kit, established the most valuable position in Daqo New Energy Corp (NYSE:DQ). Kadensa Capital had $1.4 million invested in the company at the end of the quarter. Louis Navellier's Navellier & Associates also made a $0.6 million investment in the stock during the quarter. The following funds were also among the new DQ investors: Noam Gottesman's GLG Partners, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, and Minhua Zhang's Weld Capital Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Daqo New Energy Corp (NYSE:DQ) but similarly valued. These stocks are Primoris Services Corp (NASDAQ:PRIM), Turquoise Hill Resources Ltd (NYSE:TRQ), Ferro Corporation (NYSE:FOE), and Rocket Pharmaceuticals, Inc. (NASDAQ:RCKT). This group of stocks' market valuations are similar to DQ's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PRIM,11,33113,0 TRQ,14,156233,-2 FOE,16,117594,0 RCKT,15,172485,-6 Average,14,119856,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $120 million. That figure was $43 million in DQ's case. Ferro Corporation (NYSE:FOE) is the most popular stock in this table. On the other hand Primoris Services Corp (NASDAQ:PRIM) is the least popular one with only 11 bullish hedge fund positions. Daqo New Energy Corp (NYSE:DQ) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on DQ, though not to the same extent, as the stock returned 23.4% during the first two months and twenty five days of the second quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.