We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Dorman Products Inc. (NASDAQ:DORM) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Is Dorman Products Inc. (NASDAQ:DORM) a safe stock to buy now? The best stock pickers are reducing their bets on the stock. The number of long hedge fund bets dropped by 2 recently. Our calculations also showed that DORM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). DORM was in 13 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 15 hedge funds in our database with DORM holdings at the end of the previous quarter.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 41 percentage points since March 2017 (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.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s analyze the latest hedge fund action surrounding Dorman Products Inc. (NASDAQ:DORM).
How have hedgies been trading Dorman Products Inc. (NASDAQ:DORM)?
At Q4’s end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DORM over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Dorman Products Inc. (NASDAQ:DORM), with a stake worth $31.6 million reported as of the end of September. Trailing Royce & Associates was Millennium Management, which amassed a stake valued at $5.2 million. Third Avenue Management, Citadel Investment Group, and Minerva Advisors 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 Minerva Advisors allocated the biggest weight to Dorman Products Inc. (NASDAQ:DORM), around 1.01% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, earmarking 0.88 percent of its 13F equity portfolio to DORM.
Since Dorman Products Inc. (NASDAQ:DORM) has experienced falling interest from the entirety of the hedge funds we track, it’s easy to see that there were a few fund managers that elected to cut their entire stakes in the third quarter. Interestingly, Matthew Hulsizer’s PEAK6 Capital Management cut the largest investment of the 750 funds watched by Insider Monkey, totaling close to $1.3 million in stock. Cliff Asness’s fund, AQR Capital Management, also dumped its stock, about $0.7 million worth. These moves are important to note, as aggregate hedge fund interest fell by 2 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Dorman Products Inc. (NASDAQ:DORM) but similarly valued. These stocks are Amicus Therapeutics, Inc. (NASDAQ:FOLD), Insight Enterprises, Inc. (NASDAQ:NSIT), Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), and Herman Miller, Inc. (NASDAQ:MLHR). This group of stocks’ market caps resemble DORM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| FOLD | 35 | 854075 | 7 |
| NSIT | 18 | 125686 | -3 |
| RARE | 18 | 210193 | -1 |
| MLHR | 24 | 213274 | -4 |
| Average | 23.75 | 350807 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $351 million. That figure was $54 million in DORM’s case. Amicus Therapeutics, Inc. (NASDAQ:FOLD) is the most popular stock in this table. On the other hand Insight Enterprises, Inc. (NASDAQ:NSIT) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Dorman Products Inc. (NASDAQ:DORM) is even less popular than NSIT. Hedge funds dodged a bullet by taking a bearish stance towards DORM. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. Unfortunately DORM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); DORM investors were disappointed as the stock returned -31.3% during the same time period 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 most of these stocks already outperformed the market so far in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
