“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Domtar Corporation (NYSE:UFS).
Is Domtar Corporation (NYSE:UFS) a great investment right now? Prominent investors are becoming more confident. The number of long hedge fund positions increased by 3 lately. Our calculations also showed that UFS 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Noam Gottesman of GLG Partners
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s review the fresh hedge fund action surrounding Domtar Corporation (NYSE:UFS).
How have hedgies been trading Domtar Corporation (NYSE:UFS)?
At Q3’s end, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the second quarter of 2019. By comparison, 22 hedge funds held shares or bullish call options in UFS a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the biggest position in Domtar Corporation (NYSE:UFS). AQR Capital Management has a $21.9 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Citadel Investment Group, managed by Ken Griffin, which holds a $20.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism comprise Israel Englander’s Millennium Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Quantinno Capital allocated the biggest weight to Domtar Corporation (NYSE:UFS), around 0.3% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, dishing out 0.27 percent of its 13F equity portfolio to UFS.
As one would reasonably expect, some big names have jumped into Domtar Corporation (NYSE:UFS) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most outsized position in Domtar Corporation (NYSE:UFS). Arrowstreet Capital had $12.9 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $1.4 million position during the quarter. The other funds with brand new UFS positions are Thomas Bailard’s Bailard Inc, Renee Yao’s Neo Ivy Capital, and Paul Marshall and Ian Wace’s Marshall Wace.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Domtar Corporation (NYSE:UFS) but similarly valued. We will take a look at EVO Payments, Inc. (NASDAQ:EVOP), Visteon Corporation (NASDAQ:VC), Glaukos Corporation (NYSE:GKOS), and LCI Industries (NYSE:LCII). This group of stocks’ market valuations are closest to UFS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EVOP | 15 | 45312 | 2 |
| VC | 20 | 416758 | 3 |
| GKOS | 11 | 69877 | -4 |
| LCII | 14 | 98568 | 4 |
| Average | 15 | 157629 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $158 million. That figure was $113 million in UFS’s case. Visteon Corporation (NASDAQ:VC) is the most popular stock in this table. On the other hand Glaukos Corporation (NYSE:GKOS) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Domtar Corporation (NYSE:UFS) is more popular among hedge funds. 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. Unfortunately UFS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on UFS were disappointed as the stock returned 5.6% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
