Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 24.4% during the first 9 months of 2019 and outperformed the broader market benchmark by 4 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Ducommun Incorporated (NYSE:DCO) a bargain? Investors who are in the know are taking a bullish view. The number of long hedge fund positions improved by 2 recently. Our calculations also showed that DCO isn't among the 30 most popular stocks among hedge funds (see the video below). DCO was in 11 hedge funds' portfolios at the end of June. There were 9 hedge funds in our database with DCO positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 former hedge manager, Dr. Steve Sjuggerud, 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. We're going to take a gander at the fresh hedge fund action encompassing Ducommun Incorporated (NYSE:DCO).
What have hedge funds been doing with Ducommun Incorporated (NYSE:DCO)?
At the end of the second quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of 22% from the previous quarter. By comparison, 8 hedge funds held shares or bullish call options in DCO a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Ducommun Incorporated (NYSE:DCO), with a stake worth $29.3 million reported as of the end of March. Trailing Renaissance Technologies was GAMCO Investors, which amassed a stake valued at $14.2 million. Millennium Management, AQR Capital Management, and Royce & Associates were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, key hedge funds were breaking ground themselves. Navellier & Associates, managed by Louis Navellier, created the largest position in Ducommun Incorporated (NYSE:DCO). Navellier & Associates had $1.7 million invested in the company at the end of the quarter. Peter Algert and Kevin Coldiron's Algert Coldiron Investors also initiated a $0.3 million position during the quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Ducommun Incorporated (NYSE:DCO) but similarly valued. We will take a look at FutureFuel Corp. (NYSE:FF), Boston Omaha Corporation (NASDAQ:BOMN), Mechel PAO (NYSE:MTL), and Caesarstone Ltd. (NASDAQ:CSTE). This group of stocks' market caps are similar to DCO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FF,11,47387,-4 BOMN,5,242342,0 MTL,2,1365,-1 CSTE,9,23923,3 Average,6.75,78754,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.75 hedge funds with bullish positions and the average amount invested in these stocks was $79 million. That figure was $69 million in DCO's case. FutureFuel Corp. (NYSE:FF) is the most popular stock in this table. On the other hand Mechel PAO (NYSE:MTL) is the least popular one with only 2 bullish hedge fund positions. Ducommun Incorporated (NYSE:DCO) 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 DCO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DCO were disappointed as the stock returned -5.9% 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 among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.