After several tireless days we have finished crunching the numbers from nearly 900 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms’ equity portfolios as of March 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards Discover Financial Services (NYSE:DFS).
Discover Financial Services (NYSE:DFS) investors should be aware of an increase in activity from the world’s largest hedge funds of late. Discover Financial Services (NYSE:DFS) was in 45 hedge funds’ portfolios at the end of March. The all time high for this statistic is 52. There were 43 hedge funds in our database with DFS holdings at the end of December. Our calculations also showed that DFS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
Ricky Sandler of Eminence Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation, which is why we are checking out this inflation play. We go through lists like 10 best gold stocks to buy to identify promising stocks. 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 homepage. With all of this in mind let’s take a look at the latest hedge fund action surrounding Discover Financial Services (NYSE:DFS).
Do Hedge Funds Think DFS Is A Good Stock To Buy Now?
Heading into the second quarter of 2021, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 5% from the fourth quarter of 2020. By comparison, 40 hedge funds held shares or bullish call options in DFS a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Among these funds, Alua Capital Management held the most valuable stake in Discover Financial Services (NYSE:DFS), which was worth $118.1 million at the end of the fourth quarter. On the second spot was Eminence Capital which amassed $91.3 million worth of shares. East Side Capital (RR Partners), Millennium Management, and Balyasny Asset 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 East Side Capital (RR Partners) allocated the biggest weight to Discover Financial Services (NYSE:DFS), around 9.35% of its 13F portfolio. Alua Capital Management is also relatively very bullish on the stock, dishing out 6.66 percent of its 13F equity portfolio to DFS.
As aggregate interest increased, some big names were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the biggest position in Discover Financial Services (NYSE:DFS). Balyasny Asset Management had $44 million invested in the company at the end of the quarter. Noam Gottesman’s GLG Partners also initiated a $24.6 million position during the quarter. The following funds were also among the new DFS investors: Frank Fu’s CaaS Capital, Benjamin A. Smith’s Laurion Capital Management, and Peter Seuss’s Prana Capital Management.
Let’s check out hedge fund activity in other stocks similar to Discover Financial Services (NYSE:DFS). These stocks are First Republic Bank (NYSE:FRC), ViacomCBS Inc. (NASDAQ:VIAC), Okta, Inc. (NASDAQ:OKTA), Fastenal Company (NASDAQ:FAST), Williams Companies, Inc. (NYSE:WMB), Verisk Analytics, Inc. (NASDAQ:VRSK), and Best Buy Co., Inc. (NYSE:BBY). This group of stocks’ market valuations match DFS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FRC | 41 | 1262066 | 7 |
| VIAC | 89 | 2349597 | 45 |
| OKTA | 48 | 1616565 | -13 |
| FAST | 24 | 576286 | -6 |
| WMB | 34 | 475466 | -4 |
| VRSK | 34 | 1584703 | 2 |
| BBY | 33 | 957600 | -5 |
| Average | 43.3 | 1260326 | 3.7 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 43.3 hedge funds with bullish positions and the average amount invested in these stocks was $1260 million. That figure was $654 million in DFS’s case. ViacomCBS Inc. (NASDAQ:VIAC) is the most popular stock in this table. On the other hand Fastenal Company (NASDAQ:FAST) is the least popular one with only 24 bullish hedge fund positions. Discover Financial Services (NYSE:DFS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DFS is 49.1. 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. 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 17.4% in 2021 through June 18th and still beat the market by 6.1 percentage points. Hedge funds were also right about betting on DFS as the stock returned 20.6% since the end of Q1 (through 6/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
