Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 12.1% in the first 5 months of this year through May 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Dana Incorporated (NYSE:DAN).
Is Dana Incorporated (NYSE:DAN) the right pick for your portfolio? The smart money is in a pessimistic mood. The number of long hedge fund bets were cut by 1 in recent months. Our calculations also showed that DAN isn't among the 30 most popular stocks among hedge funds. DAN was in 27 hedge funds' portfolios at the end of March. There were 28 hedge funds in our database with DAN positions 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.
Let's review the fresh hedge fund action surrounding Dana Incorporated (NYSE:DAN).
Hedge fund activity in Dana Incorporated (NYSE:DAN)
At Q1's end, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DAN over the last 15 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Dana Incorporated (NYSE:DAN) was held by GAMCO Investors, which reported holding $65.3 million worth of stock at the end of March. It was followed by Anchor Bolt Capital with a $54.8 million position. Other investors bullish on the company included D E Shaw, AQR Capital Management, and Two Sigma Advisors.
Because Dana Incorporated (NYSE:DAN) has witnessed a decline in interest from the smart money, logic holds that there were a few hedge funds who sold off their entire stakes heading into Q3. At the top of the heap, Robert Polak's Anchor Bolt Capital sold off the largest position of the "upper crust" of funds tracked by Insider Monkey, valued at close to $52.3 million in stock. Ilya Boroditsky's fund, Precision Path Capital, also cut its stock, about $18.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to Dana Incorporated (NYSE:DAN). These stocks are SailPoint Technologies Holdings, Inc. (NYSE:SAIL), Companhia Paranaense de Energia (NYSE:ELP), Southwestern Energy Company (NYSE:SWN), and Colliers International Group Inc (NASDAQ:CIGI). All of these stocks' market caps resemble DAN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SAIL,27,258676,5 ELP,10,52781,2 SWN,24,270841,-1 CIGI,14,670696,1 Average,18.75,313249,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $313 million. That figure was $343 million in DAN's case. SailPoint Technologies Holdings, Inc. (NYSE:SAIL) is the most popular stock in this table. On the other hand Companhia Paranaense de Energia (NYSE:ELP) is the least popular one with only 10 bullish hedge fund positions. Dana Incorporated (NYSE:DAN) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately DAN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DAN were disappointed as the stock returned -12.8% during the same period 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 among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.