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Here’s What Hedge Funds Think About Donaldson Company, Inc. (DCI)

Nina Todic

"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Donaldson Company, Inc. (NYSE:DCI) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Donaldson Company, Inc. (NYSE:DCI) was in 16 hedge funds' portfolios at the end of the first quarter of 2019. DCI has experienced a decrease in hedge fund sentiment in recent months. There were 19 hedge funds in our database with DCI holdings at the end of the previous quarter. Our calculations also showed that dci isn't among the 30 most popular stocks among hedge funds.

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 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.

Mario Gabelli with cereal box

Let's view the key hedge fund action regarding Donaldson Company, Inc. (NYSE:DCI).

Hedge fund activity in Donaldson Company, Inc. (NYSE:DCI)

Heading into the second quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DCI over the last 15 quarters. With hedge funds' capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

No of Hedge Funds with DCI Positions

More specifically, GAMCO Investors was the largest shareholder of Donaldson Company, Inc. (NYSE:DCI), with a stake worth $45 million reported as of the end of March. Trailing GAMCO Investors was Impax Asset Management, which amassed a stake valued at $40.4 million. Arrowstreet Capital, Citadel Investment Group, and D E Shaw were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Donaldson Company, Inc. (NYSE:DCI) has experienced falling interest from the aggregate hedge fund industry, it's safe to say that there exists a select few hedgies who sold off their positions entirely by the end of the third quarter. At the top of the heap, Paul Marshall and Ian Wace's Marshall Wace LLP sold off the biggest stake of all the hedgies followed by Insider Monkey, comprising close to $3.3 million in stock. Jim Simons's fund, Renaissance Technologies, also dropped its stock, about $1.5 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 3 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Donaldson Company, Inc. (NYSE:DCI) but similarly valued. These stocks are Kirkland Lake Gold Ltd. (NYSE:KL), ServiceMaster Global Holdings Inc (NYSE:SERV), Tilray, Inc. (NASDAQ:TLRY), and Old Republic International Corporation (NYSE:ORI). This group of stocks' market valuations are similar to DCI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KL,25,323351,2 SERV,24,522396,-3 TLRY,10,22079,2 ORI,19,432254,-4 Average,19.5,325020,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $325 million. That figure was $122 million in DCI's case. Kirkland Lake Gold Ltd. (NYSE:KL) is the most popular stock in this table. On the other hand Tilray, Inc. (NASDAQ:TLRY) is the least popular one with only 10 bullish hedge fund positions. Donaldson Company, Inc. (NYSE:DCI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately DCI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DCI investors were disappointed as the stock returned -0.7% during the same time 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.

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