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 Domino's Pizza, Inc. (NYSE:DPZ).
Domino's Pizza, Inc. (NYSE:DPZ) has seen an increase in activity from the world's largest hedge funds recently. Our calculations also showed that DPZ isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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_29562" align="aligncenter" width="600"] Stephen Mandel of Lone Pine Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to go over the recent hedge fund action regarding Domino's Pizza, Inc. (NYSE:DPZ).
How are hedge funds trading Domino's Pizza, Inc. (NYSE:DPZ)?
Heading into the fourth quarter of 2019, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from the second quarter of 2019. On the other hand, there were a total of 28 hedge funds with a bullish position in DPZ a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
More specifically, Lone Pine Capital was the largest shareholder of Domino's Pizza, Inc. (NYSE:DPZ), with a stake worth $532.7 million reported as of the end of September. Trailing Lone Pine Capital was Renaissance Technologies, which amassed a stake valued at $418.5 million. Fisher Asset Management, Eminence Capital, and Steadfast 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 Stormborn Capital Management allocated the biggest weight to Domino's Pizza, Inc. (NYSE:DPZ), around 10.5% of its portfolio. Crestwood Capital Management is also relatively very bullish on the stock, setting aside 4.7 percent of its 13F equity portfolio to DPZ.
As aggregate interest increased, key money managers have been driving this bullishness. Eminence Capital, managed by Ricky Sandler, established the most outsized position in Domino's Pizza, Inc. (NYSE:DPZ). Eminence Capital had $141.3 million invested in the company at the end of the quarter. Robert Pitts's Steadfast Capital Management also made a $131.5 million investment in the stock during the quarter. The other funds with brand new DPZ positions are Robert Pohly's Samlyn Capital, Eric W. Mandelblatt and Gaurav Kapadia's Soroban Capital Partners, and Doug Silverman and Alexander Klabin's Senator Investment Group.
Let's now review hedge fund activity in other stocks similar to Domino's Pizza, Inc. (NYSE:DPZ). We will take a look at Weibo Corp (NASDAQ:WB), Whirlpool Corporation (NYSE:WHR), Packaging Corporation Of America (NYSE:PKG), and Reinsurance Group of America Inc (NYSE:RGA). This group of stocks' market values resemble DPZ's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WB,14,353314,-2 WHR,28,978810,9 PKG,16,119433,-5 RGA,25,476554,-1 Average,20.75,482028,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $482 million. That figure was $1932 million in DPZ's case. Whirlpool Corporation (NYSE:WHR) is the most popular stock in this table. On the other hand Weibo Corp (NASDAQ:WB) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Domino's Pizza, Inc. (NYSE:DPZ) is more popular among hedge funds. 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. Hedge funds were also right about betting on DPZ as the stock returned 20.3% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.