We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Dorman Products Inc. (NASDAQ:DORM).
Dorman Products Inc. (NASDAQ:DORM) investors should pay attention to a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that DORM 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.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the latest hedge fund action encompassing Dorman Products Inc. (NASDAQ:DORM).
Hedge fund activity in Dorman Products Inc. (NASDAQ:DORM)
At the end of the third quarter, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the second quarter of 2019. On the other hand, there were a total of 11 hedge funds with a bullish position in DORM a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Dorman Products Inc. (NASDAQ:DORM) was held by Royce & Associates, which reported holding $32.5 million worth of stock at the end of September. It was followed by Third Avenue Management with a $3.5 million position. Other investors bullish on the company included Minerva Advisors, Holocene Advisors, and Horizon Asset Management. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Dorman Products Inc. (NASDAQ:DORM), around 1.18% of its 13F portfolio. Minerva Advisors is also relatively very bullish on the stock, designating 1.1 percent of its 13F equity portfolio to DORM.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: PEAK6 Capital Management. 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 only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was PEAK6 Capital Management).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Dorman Products Inc. (NASDAQ:DORM) but similarly valued. These stocks are Canada Goose Holdings Inc. (NYSE:GOOS), National General Holdings Corp (NASDAQ:NGHC), World Fuel Services Corporation (NYSE:INT), and ITT Educational Services, Inc. (NYSE:ESI). This group of stocks’ market valuations match DORM’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GOOS | 14 | 305816 | -4 |
| NGHC | 17 | 224476 | -1 |
| INT | 18 | 200195 | -1 |
| ESI | 26 | 604940 | -1 |
| Average | 18.75 | 333857 | -1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $334 million. That figure was $49 million in DORM’s case. ITT Educational Services, Inc. (NYSE:ESI) is the most popular stock in this table. On the other hand Canada Goose Holdings Inc. (NYSE:GOOS) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Dorman Products Inc. (NASDAQ:DORM) is even less popular than GOOS. 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 -6.6% during the fourth quarter (through the end of November) 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 so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
