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Were Hedge Funds Right About Souring On Dollar General Corp. (DG)?

Reymerlyn Martin

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Dollar General Corp. (NYSE:DG).

Dollar General Corp. (NYSE:DG) was in 30 hedge funds' portfolios at the end of December. DG shareholders have witnessed a decrease in activity from the world's largest hedge funds in recent months. There were 31 hedge funds in our database with DG positions at the end of the previous quarter. Our calculations also showed that DG isn't among the 30 most popular stocks among hedge funds.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Aaron Cowen Suvretta Capital

Let's take a look at the recent hedge fund action regarding Dollar General Corp. (NYSE:DG).

What have hedge funds been doing with Dollar General Corp. (NYSE:DG)?

At the end of the fourth quarter, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DG over the last 14 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

DG_mar2019

The largest stake in Dollar General Corp. (NYSE:DG) was held by Orbis Investment Management, which reported holding $633.7 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $175.5 million position. Other investors bullish on the company included Arrowstreet Capital, Samlyn Capital, and AQR Capital Management.

Because Dollar General Corp. (NYSE:DG) has faced a decline in interest from the entirety of the hedge funds we track, it's easy to see that there exists a select few funds that slashed their positions entirely by the end of the third quarter. It's worth mentioning that David Tepper's Appaloosa Management LP cut the largest investment of all the hedgies tracked by Insider Monkey, worth about $81.6 million in stock, and Ross Margolies's Stelliam Investment Management was right behind this move, as the fund dropped about $20.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 1 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks similar to Dollar General Corp. (NYSE:DG). We will take a look at Equinix Inc (NASDAQ:EQIX), Fiat Chrysler Automobiles NV (NYSE:FCAU), V.F. Corporation (NYSE:VFC), and Autodesk, Inc. (NASDAQ:ADSK). This group of stocks' market caps resemble DG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EQIX,42,1697510,1 FCAU,34,2240973,1 VFC,27,772231,-5 ADSK,59,3086673,-7 Average,40.5,1949347,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.5 hedge funds with bullish positions and the average amount invested in these stocks was $1949 million. That figure was $1296 million in DG's case. Autodesk, Inc. (NASDAQ:ADSK) is the most popular stock in this table. On the other hand V.F. Corporation (NYSE:VFC) is the least popular one with only 27 bullish hedge fund positions. Dollar General Corp. (NYSE:DG) 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately DG wasn't in this group. Hedge funds that bet on DG were disappointed as the stock returned 5.7% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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