Should You Avoid Destination XL Group Inc (DXLG)?

Billionaire hedge fund managers such as Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.

In this article, we’ll take a closer look at Destination XL Group Inc (NASDAQ:DXLG), which was included in the equity portfolios of nine funds from our database at the end of September. DXLG investors should pay attention to a slight decrease in enthusiasm from smart money last quarter. At the end of this article we will also compare DXLG to other stocks including TechTarget Inc (NASDAQ:TTGT), CRA International, Inc. (NASDAQ:CRAI), and Zix Corporation (NASDAQ:ZIXI) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Keeping this in mind, let’s take a glance at the new action surrounding Destination XL Group Inc (NASDAQ:DXLG).

What does the smart money think about Destination XL Group Inc (NASDAQ:DXLG)?

At Q3’s end, a total of nine of the hedge funds tracked by Insider Monkey were bullish on this stock, down by one fund from one quarter earlier. By comparison, nine hedge funds held shares or bullish call options in DXLG heading into this year. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Willem Mesdag’s Red Mountain Capital has the biggest position in Destination XL Group Inc (NASDAQ:DXLG), worth close to $33.1 million, accounting for 10% of its total 13F portfolio. Coming in second is Glenhill Advisors, led by Glenn J. Krevlin, which holds a $26.6 million position; the fund has 1.6% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish consist of Phil Frohlich’s Prescott Group Capital Management, Peter Schliemann’s Rutabaga Capital Management, and George McCabe’s Portolan Capital Management. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Coliseum Capital. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified DXLG as a viable investment and initiated a position in the stock.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Destination XL Group Inc (NASDAQ:DXLG) but similarly valued. We will take a look at TechTarget Inc (NASDAQ:TTGT), CRA International, Inc. (NASDAQ:CRAI), Zix Corporation (NASDAQ:ZIXI), and Invivo Therapeutics Holdings Corp (NASDAQ:NVIV). All of these stocks’ market caps are closest to DXLG’s market cap.

As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $37 million. That figure was $89 million in DXLG’s case. CRA International, Inc. (NASDAQ:CRAI) and Zix Corporation (NASDAQ:ZIXI) are the most popular stock in this table. On the other hand Invivo Therapeutics Holdings Corp (NASDAQ:NVIV) is the least popular one with only four bullish hedge fund positions. Destination XL Group Inc (NASDAQ:DXLG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard CRAI might be a better candidate to consider taking a long position in.

Disclosure: none