Hedge Funds Showering Their Blessings On These Credit Services Companies

The credit services industry has posted gains of more than 20% over the last 12 months, while year-to-date returns stand at nearly 4%. In order to uncover the best potential candidates in the industry for retail investors we decided to dig deep into the mounds of data gathered from the recent round of 13F filings and analyze which companies are getting the most attention from hedge funds.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 118% vs. 57.6% gain for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

5. Capital One Financial Corp. (NYSE:COF)

Investors with Long Positions (as of June 30): 41

Aggregate Value of Investors’ Holdings (as of June 30): $1.92 Billion

Capital One Financial Corp. (NYSE:COF) faced a loss of interest in the second quarter from the hedge funds we track, as the number of funds with investments in the company dropped from 51 firms holding $1.82 billion in shares at the end of March. So far this year, Capital One Financial Corp. (NYSE:COF)’s stock price has dropped by nearly 7%. Recently, the company announced that it was going to purchase GE Capital’s healthcare finance unit, which included $8.5 billion of U.S. healthcare-related loans. Ric Dillon’s Diamond Hill Capital is the largest stockholder of Capital One Financial Corp. (NYSE:COF) within our database, holding 3.59 million shares valued at $315.45 million.

4. Discover Financial Services (NYSE:DFS)

Investors with Long Positions (as of June 30): 45

Aggregate Value of Investors’ Holdings (as of June 30): $1.58 Billion

Discover Financial Services (NYSE:DFS) also experienced greatly declining interest during the second quarter. At the end of the first quarter, 56 hedge funds had a total investment of $1.54 billion in Discover Financial Services (NYSE:DFS). The $22.37 billion direct banking and payment services company also made it to Goldman Sach’s recent list of the 25 most oversold stocks in the wake of the current correction. Currently, the stock is trading at a cheap forward earnings multiple of 9.21. Daniel S. Och‘s OZ Management decreased its stake in the company by 2% during the June trimester to 4.29 million shares.