Did Hedge Funds Catch A Break With Domino’s Pizza, Inc. (DPZ)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Domino’s Pizza, Inc. (NYSE:DPZ) and determine whether hedge funds had an edge regarding this stock.

Domino’s Pizza, Inc. (NYSE:DPZ) was in 36 hedge funds’ portfolios at the end of September. The all time high for this statistic is 47. DPZ shareholders have witnessed an increase in enthusiasm from smart money in recent months. There were 31 hedge funds in our database with DPZ positions at the end of the second quarter. Our calculations also showed that DPZ isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

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 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. Now let’s go over the new hedge fund action encompassing Domino’s Pizza, Inc. (NYSE:DPZ).

Bill Ackman of Pershing Square

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

At third quarter’s end, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DPZ over the last 25 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Pershing Square was the largest shareholder of Domino’s Pizza, Inc. (NYSE:DPZ), with a stake worth $997.9 million reported as of the end of September. Trailing Pershing Square was Renaissance Technologies, which amassed a stake valued at $633.2 million. Melvin Capital Management, Fisher Asset Management, and Citadel Investment Group 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 Pershing Square allocated the biggest weight to Domino’s Pizza, Inc. (NYSE:DPZ), around 10.54% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, earmarking 1.99 percent of its 13F equity portfolio to DPZ.

As one would reasonably expect, some big names have been driving this bullishness. Sandler Capital Management, managed by Andrew Sandler, created the largest position in Domino’s Pizza, Inc. (NYSE:DPZ). Sandler Capital Management had $6.1 million invested in the company at the end of the quarter. Peter Muller’s PDT Partners also made a $4.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Tudor Jones’s Tudor Investment Corp, Dan Rasmussen’s Verdad Advisers, and Greg Poole’s Echo Street Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Domino’s Pizza, Inc. (NYSE:DPZ) but similarly valued. These stocks are J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Pembina Pipeline Corp (NYSE:PBA), Western Digital Corporation (NASDAQ:WDC), Pool Corporation (NASDAQ:POOL), Shinhan Financial Group Co., Ltd. (NYSE:SHG), Rollins, Inc. (NYSE:ROL), and Genuine Parts Company (NYSE:GPC). This group of stocks’ market caps are similar to DPZ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $523 million. That figure was $2542 million in DPZ’s case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand Shinhan Financial Group Co., Ltd. (NYSE:SHG) is the least popular one with only 6 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 75.8. 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 and beat the market again by 3.6 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 -4.5% since the end of September (through 1/31) 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 all of these stocks already outperformed the market since 2019.

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