In this article we will check out the progression of hedge fund sentiment towards Domtar Corporation (NYSE:UFS) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Domtar Corporation (NYSE:UFS) has seen a decrease in hedge fund interest of late. UFS was in 18 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with UFS holdings at the end of the previous quarter. Our calculations also showed that UFS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.
Clint Carlson of Carlson Capital
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a glance at the new hedge fund action regarding Domtar Corporation (NYSE:UFS).
Hedge fund activity in Domtar Corporation (NYSE:UFS)
At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards UFS over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Israel Englander’s Millennium Management has the number one position in Domtar Corporation (NYSE:UFS), worth close to $20 million, accounting for less than 0.1%% of its total 13F portfolio. Coming in second is AQR Capital Management, led by Cliff Asness, holding a $17.2 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions comprise Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Clint Carlson’s Carlson Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Jade Capital Advisors allocated the biggest weight to Domtar Corporation (NYSE:UFS), around 1.5% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, designating 0.3 percent of its 13F equity portfolio to UFS.
Due to the fact that Domtar Corporation (NYSE:UFS) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few hedge funds that slashed their full holdings last quarter. Interestingly, Donald Sussman’s Paloma Partners said goodbye to the biggest investment of the 750 funds followed by Insider Monkey, comprising an estimated $1.4 million in stock. Minhua Zhang’s fund, Weld Capital Management, also dropped its stock, about $1.1 million worth. These moves are interesting, as total hedge fund interest fell by 8 funds last quarter.
Let’s also examine hedge fund activity in other stocks similar to Domtar Corporation (NYSE:UFS). We will take a look at CareTrust REIT Inc (NASDAQ:CTRE), Pacira Biosciences Inc (NASDAQ:PCRX), Alexander’s, Inc. (NYSE:ALX), and Chesapeake Utilities Corporation (NYSE:CPK). This group of stocks’ market valuations are closest to UFS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CTRE | 7 | 19766 | -6 |
| PCRX | 26 | 368951 | -2 |
| ALX | 8 | 110151 | -5 |
| CPK | 7 | 25946 | -1 |
| Average | 12 | 131204 | -3.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $87 million in UFS’s case. Pacira Biosciences Inc (NASDAQ:PCRX) is the most popular stock in this table. On the other hand CareTrust REIT Inc (NASDAQ:CTRE) is the least popular one with only 7 bullish hedge fund positions. Domtar Corporation (NYSE:UFS) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.4% in 2020 through June 22nd but beat the market by 15.9 percentage points. Unfortunately UFS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on UFS were disappointed as the stock returned 4.4% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.
