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Were Hedge Funds Right About Crowding Into Domino’s Pizza, Inc. (DPZ)?

Reymerlyn Martin
·6 min read

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 823 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Domino's Pizza, Inc. (NYSE:DPZ) in this article.

Is Domino's Pizza, Inc. (NYSE:DPZ) a good investment now? Hedge funds were taking an optimistic view. The number of long hedge fund positions increased by 2 in recent months. Domino's Pizza, Inc. (NYSE:DPZ) was in 47 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 45. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that DPZ isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Phill Gross Adage Capital Phillip Gross
Phill Gross Adage Capital Phillip Gross

Phillip Gross of Adage Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now let's review the recent hedge fund action surrounding Domino's Pizza, Inc. (NYSE:DPZ).

What have hedge funds been doing with Domino's Pizza, Inc. (NYSE:DPZ)?

At the end of the second quarter, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in DPZ a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Domino's Pizza, Inc. (NYSE:DPZ), which was worth $568.8 million at the end of the third quarter. On the second spot was Melvin Capital Management which amassed $345.4 million worth of shares. Fisher Asset Management, Arrowstreet Capital, and AQR Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Crestwood Capital Management allocated the biggest weight to Domino's Pizza, Inc. (NYSE:DPZ), around 4.88% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, designating 2.31 percent of its 13F equity portfolio to DPZ.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Interval Partners, managed by Gregg Moskowitz, established the biggest position in Domino's Pizza, Inc. (NYSE:DPZ). Interval Partners had $19.6 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson's Adage Capital Management also made a $16.2 million investment in the stock during the quarter. The following funds were also among the new DPZ investors: Clint Carlson's Carlson Capital, Amir Mokari's Emerson Point Capital, and Doron Breen and Mori Arkin's Sphera Global Healthcare Fund.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Domino's Pizza, Inc. (NYSE:DPZ) but similarly valued. We will take a look at ViacomCBS Inc. (NASDAQ:VIAC), GSX Techedu Inc. (NYSE:GSX), Zscaler, Inc. (NASDAQ:ZS), Kansas City Southern (NYSE:KSU), Jack Henry & Associates, Inc. (NASDAQ:JKHY), Roku, Inc. (NASDAQ:ROKU), and Boston Properties, Inc. (NYSE:BXP). This group of stocks' market valuations match DPZ's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VIAC,45,1153093,-9 GSX,13,103316,0 ZS,35,641838,8 KSU,47,502734,2 JKHY,31,276056,4 ROKU,41,450808,6 BXP,36,539228,7 Average,35.4,523868,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.4 hedge funds with bullish positions and the average amount invested in these stocks was $524 million. That figure was $1747 million in DPZ's case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 13 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 87. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately DPZ wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DPZ were disappointed as the stock returned 6.9% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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