How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Dollar General Corp. (NYSE:DG).
Dollar General Corp. (NYSE:DG) was in 67 hedge funds’ portfolios at the end of June. The all time high for this statistics is 60. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. DG has seen an increase in enthusiasm from smart money recently. There were 60 hedge funds in our database with DG holdings at the end of March. Our calculations also showed that DG isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.
Ken Heebner of Capital Growth Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s take a glance at the latest hedge fund action regarding Dollar General Corp. (NYSE:DG).
Hedge fund activity in Dollar General Corp. (NYSE:DG)
At the end of the second quarter, a total of 67 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DG over the last 20 quarters. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
The largest stake in Dollar General Corp. (NYSE:DG) was held by Millennium Management, which reported holding $234.2 million worth of stock at the end of September. It was followed by Holocene Advisors with a $220.2 million position. Other investors bullish on the company included Two Sigma Advisors, Citadel Investment Group, and Renaissance Technologies. In terms of the portfolio weights assigned to each position 12th Street Asset Management allocated the biggest weight to Dollar General Corp. (NYSE:DG), around 9.89% of its 13F portfolio. Emerson Point Capital is also relatively very bullish on the stock, setting aside 7.07 percent of its 13F equity portfolio to DG.
Consequently, key money managers have been driving this bullishness. Samlyn Capital, managed by Robert Pohly, established the most outsized position in Dollar General Corp. (NYSE:DG). Samlyn Capital had $64.7 million invested in the company at the end of the quarter. Peter Simmie’s Bristol Gate Capital Partners also initiated a $52.2 million position during the quarter. The following funds were also among the new DG investors: Ken Heebner’s Capital Growth Management, Kamyar Khajavi’s MIK Capital, and Leonard Green’s Leonard Green & Partners.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Dollar General Corp. (NYSE:DG) but similarly valued. We will take a look at Barrick Gold Corporation (NYSE:GOLD), Equinor ASA (NYSE:EQNR), Lam Research Corporation (NASDAQ:LRCX), The Progressive Corporation (NYSE:PGR), Square, Inc. (NYSE:SQ), Relx PLC (NYSE:RELX), and Analog Devices, Inc. (NASDAQ:ADI). This group of stocks’ market valuations match DG’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GOLD | 52 | 3360658 | -2 |
| EQNR | 10 | 237155 | -1 |
| LRCX | 62 | 2537918 | 8 |
| PGR | 50 | 1147531 | -1 |
| SQ | 66 | 3487480 | 10 |
| RELX | 6 | 118963 | 1 |
| ADI | 49 | 2849471 | 4 |
| Average | 42.1 | 1962739 | 2.7 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 42.1 hedge funds with bullish positions and the average amount invested in these stocks was $1963 million. That figure was $2296 million in DG’s case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Relx PLC (NYSE:RELX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Dollar General Corp. (NYSE:DG) is more popular among hedge funds. Our overall hedge fund sentiment score for DG is 90. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on DG as the stock returned 16.8% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
