Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year through September 30th (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Dana Incorporated (NYSE:DAN).
Is Dana Incorporated (NYSE:DAN) a good investment now? Prominent investors are turning less bullish. The number of bullish hedge fund bets retreated by 2 lately. Our calculations also showed that DAN isn’t among the 30 most popular stocks among hedge funds (see the video below). DAN was in 25 hedge funds’ portfolios at the end of the second quarter of 2019. There were 27 hedge funds in our database with DAN positions at the end of the previous quarter.
Video: Click the image to 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 hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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 analyze the key hedge fund action regarding Dana Incorporated (NYSE:DAN).
What have hedge funds been doing with Dana Incorporated (NYSE:DAN)?
Heading into the third quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DAN over the last 16 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, GAMCO Investors, managed by Mario Gabelli, holds the biggest position in Dana Incorporated (NYSE:DAN). GAMCO Investors has a $72 million position in the stock, comprising 0.5% of its 13F portfolio. The second largest stake is held by Cliff Asness of AQR Capital Management, with a $48 million position; 0.1% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism encompass Robert Polak’s Anchor Bolt Capital, Ken Griffin’s Citadel Investment Group and John Overdeck and David Siegel’s Two Sigma Advisors.
Since Dana Incorporated (NYSE:DAN) has faced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of fund managers who were dropping their positions entirely last quarter. Interestingly, Gregg Moskowitz’s Interval Partners said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, totaling close to $3.9 million in stock. David Costen Haley’s fund, HBK Investments, also said goodbye to its stock, about $2.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 2 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Dana Incorporated (NYSE:DAN) but similarly valued. These stocks are Cabot Corporation (NYSE:CBT), American States Water Co (NYSE:AWR), Washington Federal Inc. (NASDAQ:WAFD), and Agios Pharmaceuticals Inc (NASDAQ:AGIO). This group of stocks’ market valuations resemble DAN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CBT | 17 | 123633 | -3 |
| AWR | 14 | 67350 | -1 |
| WAFD | 9 | 59821 | -6 |
| AGIO | 18 | 130908 | -4 |
| Average | 14.5 | 95428 | -3.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $363 million in DAN’s case. Agios Pharmaceuticals Inc (NASDAQ:AGIO) is the most popular stock in this table. On the other hand Washington Federal Inc. (NASDAQ:WAFD) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Dana Incorporated (NYSE:DAN) is more popular among hedge funds. 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 DAN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DAN were disappointed as the stock returned -27% 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.
