How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding DXP Enterprises Inc (NASDAQ:DXPE).
DXP Enterprises Inc (NASDAQ:DXPE) shareholders have witnessed a decrease in support from the world's most elite money managers of late. DXPE was in 11 hedge funds' portfolios at the end of the second quarter of 2019. There were 16 hedge funds in our database with DXPE positions at the end of the previous quarter. Our calculations also showed that DXPE isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
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 look at the recent hedge fund action encompassing DXP Enterprises Inc (NASDAQ:DXPE).
How have hedgies been trading DXP Enterprises Inc (NASDAQ:DXPE)?
At Q2's end, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the previous quarter. By comparison, 10 hedge funds held shares or bullish call options in DXPE a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in DXP Enterprises Inc (NASDAQ:DXPE) was held by Nantahala Capital Management, which reported holding $54.2 million worth of stock at the end of March. It was followed by Millennium Management with a $4.9 million position. Other investors bullish on the company included Renaissance Technologies, Citadel Investment Group, and AQR Capital Management.
Due to the fact that DXP Enterprises Inc (NASDAQ:DXPE) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there exists a select few hedgies that elected to cut their full holdings heading into Q3. At the top of the heap, Paul Marshall and Ian Wace's Marshall Wace LLP sold off the biggest stake of the 750 funds tracked by Insider Monkey, worth about $1.7 million in call options. Matthew Hulsizer's fund, PEAK6 Capital Management, also dumped its call options, about $0.4 million worth. These transactions are interesting, as total hedge fund interest dropped by 5 funds heading into Q3.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as DXP Enterprises Inc (NASDAQ:DXPE) but similarly valued. We will take a look at Newpark Resources Inc (NYSE:NR), Party City Holdco Inc (NYSE:PRTY), Zumiez Inc. (NASDAQ:ZUMZ), and Cohu, Inc. (NASDAQ:COHU). All of these stocks' market caps match DXPE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NR,8,26342,-7 PRTY,10,57958,-9 ZUMZ,16,56669,3 COHU,10,50030,-3 Average,11,47750,-4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $48 million. That figure was $68 million in DXPE's case. Zumiez Inc. (NASDAQ:ZUMZ) is the most popular stock in this table. On the other hand Newpark Resources Inc (NYSE:NR) is the least popular one with only 8 bullish hedge fund positions. DXP Enterprises Inc (NASDAQ:DXPE) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately DXPE wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DXPE investors were disappointed as the stock returned -8.4% 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 in 2019.
Disclosure: None. This article was originally published at Insider Monkey.