Hedge funds run by legendary names like George Soros and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant outperformance. That's why we pay special attention to hedge fund activity in these stocks.
Donnelley Financial Solutions, Inc. (NYSE:DFIN) shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. DFIN was in 14 hedge funds' portfolios at the end of the first quarter of 2019. There were 19 hedge funds in our database with DFIN positions at the end of the previous quarter. Our calculations also showed that DFIN 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 take a look at the new hedge fund action regarding Donnelley Financial Solutions, Inc. (NYSE:DFIN).
Hedge fund activity in Donnelley Financial Solutions, Inc. (NYSE:DFIN)
At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the fourth quarter of 2018. On the other hand, there were a total of 16 hedge funds with a bullish position in DFIN a year ago. So, let's see 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, Simcoe Capital Management, managed by Jeffrey Jacobowitz, holds the number one position in Donnelley Financial Solutions, Inc. (NYSE:DFIN). Simcoe Capital Management has a $40.2 million position in the stock, comprising 10.1% of its 13F portfolio. Coming in second is D. E. Shaw of D E Shaw, with a $7.3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that hold long positions contain Ken Griffin's Citadel Investment Group, Chuck Royce's Royce & Associates and Andre F. Perold's HighVista Strategies.
Since Donnelley Financial Solutions, Inc. (NYSE:DFIN) has faced declining sentiment from hedge fund managers, we can see that there was a specific group of hedge funds who sold off their entire stakes heading into Q3. Intriguingly, Mark Travis's Intrepid Capital Management sold off the biggest stake of all the hedgies tracked by Insider Monkey, valued at close to $2 million in stock. Israel Englander's fund, Millennium Management, also cut its stock, about $1.4 million worth. These moves are important to note, as total hedge fund interest dropped by 5 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to Donnelley Financial Solutions, Inc. (NYSE:DFIN). We will take a look at Just Energy Group, Inc. (NYSE:JE), Independent Bank Corporation (NASDAQ:IBCP), Peapack-Gladstone Financial Corp (NASDAQ:PGC), and El Pollo LoCo Holdings Inc (NASDAQ:LOCO). This group of stocks' market valuations resemble DFIN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JE,10,20148,1 IBCP,11,47151,0 PGC,16,73656,1 LOCO,16,26986,0 Average,13.25,41985,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $53 million in DFIN's case. Peapack-Gladstone Financial Corp (NASDAQ:PGC) is the most popular stock in this table. On the other hand Just Energy Group, Inc. (NYSE:JE) is the least popular one with only 10 bullish hedge fund positions. Donnelley Financial Solutions, Inc. (NYSE:DFIN) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately DFIN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DFIN were disappointed as the stock returned -14.9% 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.