DTS Inc. (DTSI): Are Hedge Funds Right About This Stock?

The successful funds run by legendary investors such as Dan Loeb and David Tepper make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentive to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at DTS Inc. (NASDAQ:DTSI) from the perspective of those successful funds.

Is DTS Inc. (NASDAQ:DTSI) a superb investment now? The smart money is genuinely taking an optimistic view. The number of long hedge fund positions that are disclosed in regulatory 13F filings advanced by 5 in recent months. There were 12 hedge funds in our database with DTSI positions at the end of the 2016 third quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as CorVel Corporation (NASDAQ:CRVL), National Storage Affiliates Trust (NYSE:NSA), and K2M Group Holdings Inc (NASDAQ:KTWO) to gather more data points.

We care about hedge fund sentiment because historically hedge funds’ stock picks delivered strong risk adjusted returns. There are certain segments of the market where hedge funds’ stock picks performed much better than its benchmarks. For instance, the 30 most popular mid-cap stocks among the best performing hedge funds returned 18% over the last 12 months outpacing S&P 500 Index by more than 10 percentage points. We developed this strategy 2.5 years ago and started sharing its picks in our quarterly newsletter. It bested the S&P 500 Index ETFs by delivering a solid 39% vs. 22% gain for its benchmarks.

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With all of this in mind, we’re going to check out the recent action regarding DTS Inc. (NASDAQ:DTSI).

How are hedge funds trading DTS Inc. (NASDAQ:DTSI)?

At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a boost of 71% from the second quarter of 2016. Below, you can check out the change in hedge fund sentiment towards DTSI over the last 5 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Douglas T. Granat’s Trigran Investments has the number one position in DTS Inc. (NASDAQ:DTSI), worth close to $54.4 million, amounting to 14.2% of its total 13F portfolio. The second most bullish fund manager is Royce & Associates, led by Chuck Royce, holding a $36.1 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that hold long positions consist of Renaissance Technologies, one of the largest hedge funds in the world,  Simon Davies’s Sand Grove Capital Partners and Alec Litowitz and Ross Laser’s Magnetar Capital. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As industrywide interest jumped, specific money managers have been driving this bullishness. Sand Grove Capital Partners created the most outsized position in DTS Inc. (NASDAQ:DTSI). According to regulatory filings, the fund had $18.6 million invested in the company at the end of the quarter. Magnetar Capital also initiated a $13.9 million position during the quarter. The other funds with brand new DTSI positions are Gilchrist Berg’s Water Street Capital, D. E. Shaw’s D E Shaw, and Mario Gabelli’s GAMCO Investors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as DTS Inc. (NASDAQ:DTSI) but similarly valued. These stocks are CorVel Corporation (NASDAQ:CRVL), National Storage Affiliates Trust (NYSE:NSA), K2M Group Holdings Inc (NASDAQ:KTWO), and Just Energy Group, Inc. Ordinary Shares (Canada) (NYSE:JE). This group of stocks’ market caps resemble DTSI’s market cap.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $50 million. That figure was $153 million in DTSI’s case. National Storage Affiliates Trust (NYSE:NSA) is the most popular stock in this table. On the other hand Just Energy Group, Inc. Ordinary Shares (Canada) (NYSE:JE) is the least popular one with only 9 bullish hedge fund positions. DTS Inc. (NASDAQ:DTSI) 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. In this regard NSA might be a better candidate to consider taking a long position in.

Disclosure: none.