Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first quarter. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Dollar General Corp. (NYSE:DG) to find out whether it was one of their high conviction long-term ideas.
Dollar General Corp. (NYSE:DG) shareholders have witnessed an increase in support from the world's most elite money managers lately. DG was in 31 hedge funds' portfolios at the end of March. There were 30 hedge funds in our database with DG holdings at the end of the previous quarter. Our calculations also showed that DG isn't among the 30 most popular stocks among hedge funds.
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.
We're going to check out the new hedge fund action encompassing Dollar General Corp. (NYSE:DG).
What does the smart money think about Dollar General Corp. (NYSE:DG)?
Heading into the second quarter of 2019, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards DG over the last 15 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey's hedge fund database, William B. Gray's Orbis Investment Management has the number one position in Dollar General Corp. (NYSE:DG), worth close to $465.7 million, amounting to 3.2% of its total 13F portfolio. Coming in second is Two Sigma Advisors, led by John Overdeck and David Siegel, holding a $240.6 million position; 0.6% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism contain Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Ken Griffin's Citadel Investment Group and Robert Pohly's Samlyn Capital.
With a general bullishness amongst the heavyweights, some big names have been driving this bullishness. Two Sigma Advisors, managed by John Overdeck and David Siegel, initiated the largest position in Dollar General Corp. (NYSE:DG). Two Sigma Advisors had $240.6 million invested in the company at the end of the quarter. Robert Pohly's Samlyn Capital also made a $55.2 million investment in the stock during the quarter. The other funds with new positions in the stock are John Osterweis's Osterweis Capital Management, Lee Ainslie's Maverick Capital, and Curtis Schenker and Craig Effron's Scoggin.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Dollar General Corp. (NYSE:DG) but similarly valued. We will take a look at Southern Copper Corporation (NYSE:SCCO), Yum! Brands, Inc. (NYSE:YUM), Electronic Arts Inc. (NASDAQ:EA), and O'Reilly Automotive Inc (NASDAQ:ORLY). This group of stocks' market valuations are similar to DG's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SCCO,13,235031,-2 YUM,32,1109729,-2 EA,61,2742637,4 ORLY,43,2015940,-2 Average,37.25,1525834,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 37.25 hedge funds with bullish positions and the average amount invested in these stocks was $1526 million. That figure was $1121 million in DG's case. Electronic Arts Inc. (NASDAQ:EA) is the most popular stock in this table. On the other hand Southern Copper Corporation (NYSE:SCCO) is the least popular one with only 13 bullish hedge fund positions. Dollar General Corp. (NYSE:DG) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on DG as the stock returned 6.7% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.