How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Dollar General Corp. (NYSE:DG) and determine whether hedge funds had an edge regarding this stock.
Dollar General Corp. (NYSE:DG) has experienced an increase in hedge fund interest recently. Our calculations also showed that DG isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Ken Heebner of Capital Growth Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to check out the new hedge fund action encompassing Dollar General Corp. (NYSE:DG).
How have hedgies been trading Dollar General Corp. (NYSE:DG)?
At Q2’s end, a total of 67 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. By comparison, 37 hedge funds held shares or bullish call options in DG a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
More specifically, Millennium Management was the largest shareholder of Dollar General Corp. (NYSE:DG), with a stake worth $234.2 million reported as of the end of September. Trailing Millennium Management was Holocene Advisors, which amassed a stake valued at $220.2 million. Two Sigma Advisors, Citadel Investment Group, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position 12th Street Asset Management allocated the biggest weight to Dollar General Corp. (NYSE:DG), around 9.89% of its 13F portfolio. Emerson Point Capital is also relatively very bullish on the stock, setting aside 7.07 percent of its 13F equity portfolio to DG.
As one would reasonably expect, some big names were breaking ground themselves. Samlyn Capital, managed by Robert Pohly, assembled the biggest position in Dollar General Corp. (NYSE:DG). Samlyn Capital had $64.7 million invested in the company at the end of the quarter. Peter Simmie’s Bristol Gate Capital Partners also initiated a $52.2 million position during the quarter. The other funds with new positions in the stock are Ken Heebner’s Capital Growth Management, Kamyar Khajavi’s MIK Capital, and Leonard Green’s Leonard Green & Partners.
Let’s now take a look at hedge fund activity in other stocks similar to Dollar General Corp. (NYSE:DG). These stocks are Barrick Gold Corporation (NYSE:GOLD), Equinor ASA (NYSE:EQNR), Lam Research Corporation (NASDAQ:LRCX), The Progressive Corporation (NYSE:PGR), Square, Inc. (NYSE:SQ), Relx PLC (NYSE:RELX), and Analog Devices, Inc. (NASDAQ:ADI). This group of stocks’ market valuations resemble DG’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GOLD | 52 | 3360658 | -2 |
| EQNR | 10 | 237155 | -1 |
| LRCX | 62 | 2537918 | 8 |
| PGR | 50 | 1147531 | -1 |
| SQ | 66 | 3487480 | 10 |
| RELX | 6 | 118963 | 1 |
| ADI | 49 | 2849471 | 4 |
| Average | 42.1 | 1962739 | 2.7 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 42.1 hedge funds with bullish positions and the average amount invested in these stocks was $1963 million. That figure was $2296 million in DG’s case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Relx PLC (NYSE:RELX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Dollar General Corp. (NYSE:DG) is more popular among hedge funds. Our overall hedge fund sentiment score for DG is 90. 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 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 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. Unfortunately DG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DG were disappointed as the stock returned 4.3% since the end of the second quarter 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.
