Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Is Dover Corporation (NYSE:DOV) a worthy investment now? The smart money is turning bullish. The number of bullish hedge fund positions advanced by 2 in recent months. Our calculations also showed that DOV isn't among the 30 most popular stocks among hedge funds. DOV was in 32 hedge funds' portfolios at the end of June. There were 30 hedge funds in our database with DOV holdings at the end of the previous quarter.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's analyze the recent hedge fund action encompassing Dover Corporation (NYSE:DOV).
Hedge fund activity in Dover Corporation (NYSE:DOV)
At the end of the second quarter, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the previous quarter. By comparison, 24 hedge funds held shares or bullish call options in DOV a year ago. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
More specifically, Citadel Investment Group was the largest shareholder of Dover Corporation (NYSE:DOV), with a stake worth $156.2 million reported as of the end of March. Trailing Citadel Investment Group was AQR Capital Management, which amassed a stake valued at $83 million. Adage Capital Management, Millennium Management, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, some big names were breaking ground themselves. Carlson Capital, managed by Clint Carlson, created the most valuable position in Dover Corporation (NYSE:DOV). Carlson Capital had $20 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also initiated a $1.5 million position during the quarter. The other funds with brand new DOV positions are Michael Gelband's ExodusPoint Capital, Ronald Hua's Qtron Investments, and Paul Tudor Jones's Tudor Investment Corp.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Dover Corporation (NYSE:DOV) but similarly valued. We will take a look at Evergy, Inc. (NYSE:EVRG), Tableau Software Inc (NYSE:DATA), W.W. Grainger, Inc. (NYSE:GWW), and Magellan Midstream Partners, L.P. (NYSE:MMP). This group of stocks' market values match DOV's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EVRG,25,962365,1 DATA,55,3598512,11 GWW,21,285138,-8 MMP,10,62495,0 Average,27.75,1227128,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $1227 million. That figure was $604 million in DOV's case. Tableau Software Inc (NYSE:DATA) is the most popular stock in this table. On the other hand Magellan Midstream Partners, L.P. (NYSE:MMP) is the least popular one with only 10 bullish hedge fund positions. Dover Corporation (NYSE:DOV) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately DOV wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DOV were disappointed as the stock returned -0.1% during the third 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 (see the video below) among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.