Hedge Funds Are Cashing Out Of Discover Financial Services (DFS)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 873 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th. In this article we look at what those investors think of Discover Financial Services (NYSE:DFS).

Discover Financial Services (NYSE:DFS) shareholders have witnessed a decrease in hedge fund interest of late. Discover Financial Services (NYSE:DFS) was in 37 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 52. There were 45 hedge funds in our database with DFS positions at the end of the first quarter. Our calculations also showed that DFS isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

To the average investor there are a lot of gauges market participants put to use to size up their holdings. Two of the most under-the-radar gauges are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the top picks of the top hedge fund managers can outclass their index-focused peers by a superb margin (see the details here). Also, our monthly newsletter’s portfolio of long stock picks returned 185.4% since March 2017 (through August 2021) and beat the S&P 500 Index by more than 79 percentage points. You can download a sample issue of this newsletter on our website.

Israel Englander of Millennium Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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. Now let’s analyze the recent hedge fund action surrounding Discover Financial Services (NYSE:DFS).

Do Hedge Funds Think DFS Is A Good Stock To Buy Now?

At second quarter’s end, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DFS over the last 24 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Discover Financial Services (NYSE:DFS) was held by East Side Capital (RR Partners), which reported holding $95.8 million worth of stock at the end of June. It was followed by Arrowstreet Capital with a $81.2 million position. Other investors bullish on the company included Citadel Investment Group, Millennium Management, and Balyasny Asset Management. 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 10.32% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, earmarking 2.68 percent of its 13F equity portfolio to DFS.

Judging by the fact that Discover Financial Services (NYSE:DFS) has experienced a decline in interest from hedge fund managers, we can see that there was a specific group of hedgies that slashed their positions entirely heading into Q3. At the top of the heap, Ricky Sandler’s Eminence Capital sold off the biggest investment of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $91.3 million in stock. Michael Gelband’s fund, ExodusPoint Capital, also cut its stock, about $11.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 8 funds heading into Q3.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Discover Financial Services (NYSE:DFS) but similarly valued. These stocks are The Hershey Company (NYSE:HSY), ResMed Inc. (NYSE:RMD), XPeng Inc. (NYSE:XPEV), Cummins Inc. (NYSE:CMI), Xilinx, Inc. (NASDAQ:XLNX), TransDigm Group Incorporated (NYSE:TDG), and Xcel Energy Inc (NASDAQ:XEL). This group of stocks’ market caps are closest to DFS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $2185 million. That figure was $451 million in DFS’s case. Xilinx, Inc. (NASDAQ:XLNX) is the most popular stock in this table. On the other hand XPeng Inc. (NYSE:XPEV) is the least popular one with only 19 bullish hedge fund positions. Discover Financial Services (NYSE:DFS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DFS is 40.8. 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 21.8% in 2021 through October 11th and still beat the market by 4.4 percentage points. A small number of hedge funds were also right about betting on DFS as the stock returned 6.7% since the end of the second quarter (through 10/11) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.