Should You Be Concerned About Diamond Offshore Drilling Inc (DO)’s Falling Hedge Fund Ownership?

Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Is Diamond Offshore Drilling Inc (NYSE:DO) a buy here? The best stock pickers are turning less bullish. The number of bullish hedge fund bets were trimmed by 1 in recent months. DO was in 24 hedge funds’ portfolios at the end of September. There were 25 hedge funds in our database with DO positions at the end of the previous quarter. At the end of this article we will also compare DO to other stocks including Outfront Media Inc (NYSE:OUT), Quanta Services Inc (NYSE:PWR), and PAREXEL International Corporation (NASDAQ:PRXL) 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.

QiuJu Song/Shuterrstock.com

What have hedge funds been doing with Diamond Offshore Drilling Inc (NYSE:DO)?

Heading into the fourth quarter of 2016, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a 4% dip from the second quarter of 2016 and the second straight quarterly drop in hedge fund ownership, with it having fallen by 25% during that time. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Cliff Asness’ AQR Capital Management has the biggest position in Diamond Offshore Drilling Inc (NYSE:DO), worth close to $64.2 million. The second most bullish fund manager is Point72 Asset Management, led by Steve Cohen, holding a $19.1 million position. Remaining members of the smart money that hold long positions comprise Paul Marshall and Ian Wace’s Marshall Wace LLP, Vince Maddi and Shawn Brennan’s SIR Capital Management and Chuck Royce’s Royce & Associates.

Seeing as Diamond Offshore Drilling Inc (NYSE:DO) has experienced falling interest from hedge fund managers, we can see that there is a sect of hedge funds who sold off their entire stakes heading into Q4. At the top of the heap, Jim Simons’ Renaissance Technologies dropped the biggest position of the 700 funds monitored by Insider Monkey, comprising an estimated $4 million in stock, and David Costen Haley’s HBK Investments was right behind this move, as the fund said goodbye to about $2.7 million worth of shares. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 1 fund heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Diamond Offshore Drilling Inc (NYSE:DO). These stocks are Outfront Media Inc (NYSE:OUT), Quanta Services Inc (NYSE:PWR), PAREXEL International Corporation (NASDAQ:PRXL), and Companhia Siderurgica Nacional (ADR) (NYSE:SID). All of these stocks’ market caps match DO’s market cap.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $214 million. That figure was $161 million in DO’s case. Quanta Services Inc (NYSE:PWR) is the most popular stock in this table. On the other hand Companhia Siderurgica Nacional (ADR) (NYSE:SID) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Diamond Offshore Drilling Inc (NYSE:DO) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio, bearing in mind the sliding ownership of it.

Disclosure: None