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Were Hedge Funds Right About Selling Dillard’s, Inc. (DDS)?

Asma UL Husna

"I have been following Dr. Inan Dogan since this outbreak, and he is  a phenomenally intelligent researcher. One month ago, Dr. Dogan's prediction that the total U.S. death toll would be 20,000+ by April 15th was deemed "radical". His Recession is Imminent article in February was very timely. Now he believes we could quickly end lockdowns in NYC after some simple testing. A must read" were the words used by our readers to describe our latest article.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Dillard's, Inc. (NYSE:DDS), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Dillard's, Inc. (NYSE:DDS) shareholders have witnessed a decrease in activity from the world's largest hedge funds in recent months. Our calculations also showed that DDS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 S&P 500 ETFs by more than 41 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

[caption id="attachment_340075" align="aligncenter" width="399"] Mason Hawkins of Southeastern Asset Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We are probably at the peak of the COVID-19 pandemic, so we check out this biotech investor's coronavirus picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager's coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's analyze the recent hedge fund action surrounding Dillard's, Inc. (NYSE:DDS).

How are hedge funds trading Dillard's, Inc. (NYSE:DDS)?

Heading into the first quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the third quarter of 2019. On the other hand, there were a total of 14 hedge funds with a bullish position in DDS a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

More specifically, Southeastern Asset Management was the largest shareholder of Dillard's, Inc. (NYSE:DDS), with a stake worth $149.8 million reported as of the end of September. Trailing Southeastern Asset Management was Contrarius Investment Management, which amassed a stake valued at $85.1 million. AQR Capital Management, Citadel Investment Group, and Arrowstreet Capital 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 Contrarius Investment Management allocated the biggest weight to Dillard's, Inc. (NYSE:DDS), around 4.46% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, earmarking 2.5 percent of its 13F equity portfolio to DDS.

Judging by the fact that Dillard's, Inc. (NYSE:DDS) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there were a few hedge funds that decided to sell off their positions entirely heading into Q4. It's worth mentioning that David Einhorn's Greenlight Capital said goodbye to the largest stake of the "upper crust" of funds watched by Insider Monkey, comprising close to $19.6 million in stock, and Philippe Laffont's Coatue Management was right behind this move, as the fund said goodbye to about $12.3 million worth. These transactions are important to note, as total hedge fund interest was cut by 2 funds heading into Q4.

Let's go over hedge fund activity in other stocks similar to Dillard's, Inc. (NYSE:DDS). These stocks are Global Net Lease, Inc. (NYSE:GNL), Jagged Peak Energy Inc. (NYSE:JAG), Harsco Corporation (NYSE:HSC), and Mueller Industries, Inc. (NYSE:MLI). All of these stocks' market caps match DDS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GNL,10,54469,-5 JAG,11,146367,-4 HSC,21,181577,3 MLI,21,215236,2 Average,15.75,149412,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $149 million. That figure was $346 million in DDS's case. Harsco Corporation (NYSE:HSC) is the most popular stock in this table. On the other hand Global Net Lease, Inc. (NYSE:GNL) is the least popular one with only 10 bullish hedge fund positions. Dillard's, Inc. (NYSE:DDS) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately DDS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DDS were disappointed as the stock returned -54.9% during the same time period 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. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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