Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Douglas Dynamics Inc (NYSE:PLOW).
Douglas Dynamics Inc (NYSE:PLOW) was in 10 hedge funds’ portfolios at the end of September. PLOW has seen an increase in support from the world’s most elite money managers recently. There were 7 hedge funds in our database with PLOW holdings at the end of the previous quarter. Our calculations also showed that PLOW isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Today there are dozens of methods market participants have at their disposal to appraise stocks. A pair of the most underrated methods are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the top picks of the elite fund managers can trounce the S&P 500 by a healthy amount (see the details here).
Richard Driehaus of Driehaus 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. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to view the fresh hedge fund action surrounding Douglas Dynamics Inc (NYSE:PLOW).
What does smart money think about Douglas Dynamics Inc (NYSE:PLOW)?
At Q3’s end, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 43% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PLOW over the last 17 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Douglas Dynamics Inc (NYSE:PLOW) was held by Driehaus Capital, which reported holding $6.3 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $4.4 million position. Other investors bullish on the company included Navellier & Associates, Renaissance Technologies, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Navellier & Associates allocated the biggest weight to Douglas Dynamics Inc (NYSE:PLOW), around 0.67% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, designating 0.21 percent of its 13F equity portfolio to PLOW.
As one would reasonably expect, key hedge funds have been driving this bullishness. Driehaus Capital, managed by Richard Driehaus, assembled the biggest position in Douglas Dynamics Inc (NYSE:PLOW). Driehaus Capital had $6.3 million invested in the company at the end of the quarter. Peter Muller’s PDT Partners also initiated a $0.3 million position during the quarter. The only other fund with a new position in the stock is Michael Gelband’s ExodusPoint Capital.
Let’s go over hedge fund activity in other stocks similar to Douglas Dynamics Inc (NYSE:PLOW). We will take a look at PC Connection, Inc. (NASDAQ:CNXN), NextGen Healthcare, Inc. (NASDAQ:NXGN), Universal Insurance Holdings, Inc. (NYSE:UVE), and Kraton Corporation (NYSE:KRA). This group of stocks’ market valuations match PLOW’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CNXN | 11 | 50307 | 3 |
| NXGN | 12 | 32218 | -2 |
| UVE | 14 | 62385 | 0 |
| KRA | 15 | 71046 | -2 |
| Average | 13 | 53989 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $20 million in PLOW’s case. Kraton Corporation (NYSE:KRA) is the most popular stock in this table. On the other hand PC Connection, Inc. (NASDAQ:CNXN) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Douglas Dynamics Inc (NYSE:PLOW) is even less popular than CNXN. Hedge funds clearly dropped the ball on PLOW as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on PLOW as the stock returned 21.4% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
