Was The Smart Money Right About Discover Financial Services (DFS)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the third quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 6 years and analyze what the smart money thinks of Discover Financial Services (NYSE:DFS) based on that data and determine whether they were really smart about the stock.

Discover Financial Services (NYSE:DFS) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 37 hedge funds’ portfolios at the end of the third quarter of 2021. Our calculations also showed that DFS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings). At the end of this article we will also compare DFS to other stocks including Okta, Inc. (NASDAQ:OKTA), Zscaler, Inc. (NASDAQ:ZS), and Centene Corporation (NYSE:CNC) to get a better sense of its popularity.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s take a glance at the new hedge fund action surrounding Discover Financial Services (NYSE:DFS).

Ian Wace of Marshall Wace

Do Hedge Funds Think DFS Is A Good Stock To Buy Now?

Heading into the fourth quarter of 2021, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the second quarter of 2021. On the other hand, there were a total of 47 hedge funds with a bullish position in DFS a year ago. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

The largest stake in Discover Financial Services (NYSE:DFS) was held by Arrowstreet Capital, which reported holding $243.9 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $53.8 million position. Other investors bullish on the company included Millennium Management, Citadel Investment Group, and Alua Capital Management. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Discover Financial Services (NYSE:DFS), around 2.81% of its 13F portfolio. Alua Capital Management is also relatively very bullish on the stock, setting aside 1.27 percent of its 13F equity portfolio to DFS.

Judging by the fact that Discover Financial Services (NYSE:DFS) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there is a sect of fund managers that decided to sell off their positions entirely heading into Q4. Interestingly, Steven Richman’s East Side Capital (RR Partners) dropped the biggest position of the 750 funds followed by Insider Monkey, comprising an estimated $95.8 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also said goodbye to its stock, about $37 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Discover Financial Services (NYSE:DFS). We will take a look at Okta, Inc. (NASDAQ:OKTA), Zscaler, Inc. (NASDAQ:ZS), Centene Corporation (NYSE:CNC), CRH PLC (NYSE:CRH), General Mills, Inc. (NYSE:GIS), SBA Communications Corporation (NASDAQ:SBAC), and Yum! Brands, Inc. (NYSE:YUM). This group of stocks’ market values match DFS’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.6 hedge funds with bullish positions and the average amount invested in these stocks was $1398 million. That figure was $516 million in DFS’s case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand CRH PLC (NYSE:CRH) is the least popular one with only 7 bullish hedge fund positions. Discover Financial Services (NYSE:DFS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DFS is 53.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and surpassed the market again by 3.6 percentage points. Unfortunately, DFS wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); DFS investors were disappointed as the stock returned -5.4% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.