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Was The Smart Money Right About Domino’s Pizza, Inc. (DPZ)?

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  • DPUKY

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Domino's Pizza, Inc. (NYSE:DPZ).

Domino's Pizza, Inc. (NYSE:DPZ) investors should pay attention to an increase in hedge fund interest in recent months. Domino's Pizza, Inc. (NYSE:DPZ) was in 31 hedge funds' portfolios at the end of June. The all time high for this statistic is 47. Our calculations also showed that DPZ isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 percentage points since March 2017 (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.

Can hedge funds beat the market
Can hedge funds beat the market

Bill Ackman of Pershing Square

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's take a look at the key hedge fund action encompassing Domino's Pizza, Inc. (NYSE:DPZ).

Do Hedge Funds Think DPZ Is A Good Stock To Buy Now?

At Q2's end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from the previous quarter. On the other hand, there were a total of 47 hedge funds with a bullish position in DPZ a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Bill Ackman's Pershing Square has the biggest position in Domino's Pizza, Inc. (NYSE:DPZ), worth close to $951.3 million, corresponding to 8.9% of its total 13F portfolio. On Pershing Square's heels is Renaissance Technologies, with a $572.9 million position; 0.7% of its 13F portfolio is allocated to the stock. Other members of the smart money that hold long positions encompass Gabriel Plotkin's Melvin Capital Management, Ken Fisher's Fisher Asset Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Pershing Square allocated the biggest weight to Domino's Pizza, Inc. (NYSE:DPZ), around 8.88% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, earmarking 2.02 percent of its 13F equity portfolio to DPZ.

As industrywide interest jumped, key money managers have been driving this bullishness. Melvin Capital Management, managed by Gabriel Plotkin, created the biggest position in Domino's Pizza, Inc. (NYSE:DPZ). Melvin Capital Management had $244.9 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $44.4 million investment in the stock during the quarter. The other funds with brand new DPZ positions are Phill Gross and Robert Atchinson's Adage Capital Management, Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, and Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management.

Let's go over hedge fund activity in other stocks similar to Domino's Pizza, Inc. (NYSE:DPZ). These stocks are NVR, Inc. (NYSE:NVR), Healthpeak Properties, Inc. (NYSE:PEAK), Bentley Systems, Incorporated (NASDAQ:BSY), Boston Properties, Inc. (NYSE:BXP), Farfetch Limited (NYSE:FTCH), Affirm Holdings, Inc. (NASDAQ:AFRM), and Raymond James Financial, Inc. (NYSE:RJF). All of these stocks' market caps are closest to DPZ's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NVR,28,1093288,-11 PEAK,22,119796,4 BSY,17,81427,-5 BXP,19,1397759,-8 FTCH,63,4253088,6 AFRM,25,823640,-7 RJF,29,662093,-4 Average,29,1204442,-3.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $1204 million. That figure was $2495 million in DPZ's case. Farfetch Limited (NYSE:FTCH) is the most popular stock in this table. On the other hand Bentley Systems, Incorporated (NASDAQ:BSY) is the least popular one with only 17 bullish hedge fund positions. Domino's Pizza, Inc. (NYSE:DPZ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DPZ is 42. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately DPZ wasn't nearly as popular as these 5 stocks and hedge funds that were betting on DPZ were disappointed as the stock returned 6.5% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.