Were Hedge Funds Right About Daqo New Energy Corp (DQ)?

In this article you are going to find out whether hedge funds think Daqo New Energy Corp (NYSE:DQ) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Daqo New Energy Corp (NYSE:DQ) the right pick for your portfolio? Hedge funds were cutting their exposure. The number of long hedge fund bets fell by 1 recently. Daqo New Energy Corp (NYSE:DQ) was in 17 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 18. Our calculations also showed that DQ isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

James Dinan of York Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Now let’s take a look at the latest hedge fund action encompassing Daqo New Energy Corp (NYSE:DQ).

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

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 15 hedge funds with a bullish position in DQ a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Millennium Management was the largest shareholder of Daqo New Energy Corp (NYSE:DQ), with a stake worth $29.5 million reported as of the end of March. Trailing Millennium Management was Citadel Investment Group, which amassed a stake valued at $25.6 million. Tairen Capital, York Capital Management, and D E Shaw 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 Tairen Capital allocated the biggest weight to Daqo New Energy Corp (NYSE:DQ), around 2.76% of its 13F portfolio. York Capital Management is also relatively very bullish on the stock, earmarking 2.58 percent of its 13F equity portfolio to DQ.

Judging by the fact that Daqo New Energy Corp (NYSE:DQ) has faced declining sentiment from the smart money, logic holds that there is a sect of funds who were dropping their positions entirely heading into Q2. Interestingly, Michael Gelband’s ExodusPoint Capital dumped the biggest position of all the hedgies watched by Insider Monkey, comprising about $11.1 million in stock, and Yi Xin’s Ariose Capital was right behind this move, as the fund dropped about $9.9 million worth. These moves are important to note, as total hedge fund interest dropped by 1 funds heading into Q2.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Daqo New Energy Corp (NYSE:DQ) but similarly valued. We will take a look at The Howard Hughes Corporation (NYSE:HHC), Herbalife Nutrition Ltd. (NYSE:HLF), Bank OZK (NASDAQ:OZK), Kemper Corporation (NYSE:KMPR), Oscar Health, Inc. (NYSE:OSCR), EQT Corporation (NYSE:EQT), and Chart Industries, Inc. (NYSE:GTLS). All of these stocks’ market caps are similar to DQ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $852 million. That figure was $130 million in DQ’s case. Herbalife Nutrition Ltd. (NYSE:HLF) is the most popular stock in this table. On the other hand Kemper Corporation (NYSE:KMPR) is the least popular one with only 11 bullish hedge fund positions. Daqo New Energy Corp (NYSE:DQ) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DQ is 42.7. 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 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately DQ wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); DQ investors were disappointed as the stock returned -21.8% since the end of March (through 7/23) 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 most of these stocks already outperformed the market in 2021.

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