Hedge Funds Are Betting On Discover Financial Services (DFS)

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. The Standard and Poor’s 500 Index returned 5.2% over the 12-month period ending October 30, while more than 51% of the constituents of the index underperformed the benchmark. Hence, a random stock picking process will most likely lead to disappointment. At the same time, the 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey (as of September 2014) generated a return of 9.5% over the same time span, with 63% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Discover Financial Services (NYSE:DFS).

Is Discover Financial Services a buy right now? The best stock pickers are in an optimistic mood. The number of long hedge fund bets advanced by 7 recently. DFS was in 52 hedge funds’ portfolios at the end of the third quarter of 2015. There were 45 hedge funds in our database with DFS holdings at the end of the previous quarter. At the end of this article we will also compare DFS to other stocks including Waste Management, Inc. (NYSE:WM), Activision Blizzard, Inc. (NASDAQ:ATVI), and Fiat Chrysler Automobiles NV (NYSE:FCAU) to get a better sense of its popularity.

Now, we’re going to take a peek at the key action surrounding Discover Financial Services (NYSE:DFS).

How are hedge funds trading Discover Financial Services (NYSE:DFS)?

At Q3’s end, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from one quarter earlier. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Doug Silverman and Alexander Klabin’s Senator Investment Group has the biggest position in Discover Financial Services (NYSE:DFS), worth close to $519.9 million, amounting to 6.4% of its total 13F portfolio. On Senator Investment Group’s heels is John A. Levin of Levin Capital Strategies, with a $173.7 million position; 3% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions include Cliff Asness’s AQR Capital Management, Ken Griffin’s Citadel Investment Group and Israel Englander’s Millennium Management.

As one would reasonably expect, some big names were leading the bulls’ herd. TPG-AXON Management LP, managed by Dinakar Singh, initiated the biggest position in Discover Financial Services (NYSE:DFS). TPG-AXON Management LP had $91.8 million invested in the company at the end of the quarter. Ross Margolies’ Stelliam Investment Management also initiated a $39.9 million position during the quarter. The other funds with brand new DFS positions are Joshua Nash’s Ulysses Management, Porter Collins, Daniel Moses, and Vincent Daniel’s Seawolf Capital, and Steve Cohen’s Point72 Asset Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Discover Financial Services (NYSE:DFS) but similarly valued. We will take a look at Waste Management, Inc. (NYSE:WM), Activision Blizzard, Inc. (NASDAQ:ATVI), Fiat Chrysler Automobiles NV (NYSE:FCAU), and Chipotle Mexican Grill, Inc. (NYSE:CMG). This group of stocks’ market values are closest to DFS’s market value.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1431 million. That figure was $1901 million in DFS’s case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand Chipotle Mexican Grill, Inc. (NYSE:CMG) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Discover Financial Services (NYSE:DFS) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.