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 (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Domino’s Pizza, Inc. (NYSE:DPZ)? The smart money sentiment can provide an answer to this question.
Is Domino’s Pizza, Inc. (NYSE:DPZ) a healthy stock for your portfolio? Investors who are in the know are becoming less hopeful. The number of long hedge fund bets retreated by 8 lately. Our calculations also showed that DPZ isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). DPZ was in 31 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 39 hedge funds in our database with DPZ positions at the end of the previous quarter.
In today’s marketplace there are a multitude of tools shareholders use to appraise stocks. A pair of the most underrated tools are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the best fund managers can trounce their index-focused peers by a healthy margin (see the details here).
Ricky Sandler of Eminence Capital
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. Keeping this in mind let’s analyze the fresh hedge fund action encompassing Domino’s Pizza, Inc. (NYSE:DPZ).
What have hedge funds been doing with Domino’s Pizza, Inc. (NYSE:DPZ)?
At Q4’s end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in DPZ over the last 18 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
Among these funds, Lone Pine Capital held the most valuable stake in Domino’s Pizza, Inc. (NYSE:DPZ), which was worth $508.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $501.2 million worth of shares. Fisher Asset Management, Steadfast Capital Management, and Eminence Capital 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 Stormborn Capital Management allocated the biggest weight to Domino’s Pizza, Inc. (NYSE:DPZ), around 16.67% of its 13F portfolio. Crestwood Capital Management is also relatively very bullish on the stock, earmarking 4.81 percent of its 13F equity portfolio to DPZ.
Since Domino’s Pizza, Inc. (NYSE:DPZ) has witnessed declining sentiment from the smart money, it’s easy to see that there is a sect of hedge funds that elected to cut their full holdings in the third quarter. It’s worth mentioning that Eric W. Mandelblatt and Gaurav Kapadia’s Soroban Capital Partners dumped the largest stake of all the hedgies tracked by Insider Monkey, valued at about $63.5 million in call options. Robert Pohly’s fund, Samlyn Capital, also sold off its call options, about $44.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 8 funds in the third quarter.
Let’s check out hedge fund activity in other stocks similar to Domino’s Pizza, Inc. (NYSE:DPZ). We will take a look at 0, Open Text Corporation (NASDAQ:OTEX), Noble Energy, Inc. (NASDAQ:NBL), and The J.M. Smucker Company (NYSE:SJM). This group of stocks’ market caps resemble DPZ’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| J | 35 | 1066423 | 6 |
| OTEX | 14 | 518546 | -1 |
| NBL | 28 | 488251 | -1 |
| SJM | 31 | 450185 | 3 |
| Average | 27 | 630851 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $631 million. That figure was $1995 million in DPZ’s case. 0 is the most popular stock in this table. On the other hand Open Text Corporation (NASDAQ:OTEX) is the least popular one with only 14 bullish hedge fund positions. Domino’s Pizza, Inc. (NYSE:DPZ) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. Hedge funds were also right about betting on DPZ as the stock returned -2.3% during the first quarter (through March 16th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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.
