Were Hedge Funds Right About Designer Brands Inc. (DBI)?

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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Designer Brands Inc. (NYSE:DBI) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Hedge fund interest in Designer Brands Inc. (NYSE:DBI) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare DBI to other stocks including Costamare Inc (NYSE:CMRE), NexPoint Residential Trust, Inc. (NYSE:NXRT), and Pampa Energia S.A. (NYSE:PAM) to get a better sense of its popularity.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to take a peek at the recent hedge fund action encompassing Designer Brands Inc. (NYSE:DBI).

How are hedge funds trading Designer Brands Inc. (NYSE:DBI)?

At Q4’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the third quarter of 2019. By comparison, 27 hedge funds held shares or bullish call options in DBI a year ago. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in Designer Brands Inc. (NYSE:DBI) was held by Royce & Associates, which reported holding $28.2 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $19.8 million position. Other investors bullish on the company included Renaissance Technologies, Skylands Capital, and Masters Capital Management. In terms of the portfolio weights assigned to each position Pacifica Capital Investments allocated the biggest weight to Designer Brands Inc. (NYSE:DBI), around 2.82% of its 13F portfolio. Skylands Capital is also relatively very bullish on the stock, dishing out 1.36 percent of its 13F equity portfolio to DBI.

Judging by the fact that Designer Brands Inc. (NYSE:DBI) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few hedgies that slashed their full holdings heading into Q4. It’s worth mentioning that David Keidan’s Buckingham Capital Management said goodbye to the biggest position of the 750 funds tracked by Insider Monkey, worth about $11.3 million in stock. Israel Englander’s fund, Millennium Management, also dropped its stock, about $5.4 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Designer Brands Inc. (NYSE:DBI). These stocks are Costamare Inc (NYSE:CMRE), NexPoint Residential Trust, Inc. (NYSE:NXRT), Pampa Energia S.A. (NYSE:PAM), and RPC, Inc. (NYSE:RES). This group of stocks’ market valuations resemble DBI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $102 million. That figure was $104 million in DBI’s case. Costamare Inc (NYSE:CMRE) is the most popular stock in this table. On the other hand Pampa Energia S.A. (NYSE:PAM) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Designer Brands Inc. (NYSE:DBI) is more popular among hedge funds. 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 gained 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately DBI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DBI were disappointed as the stock returned -60.5% during the four months of 2020 (through May 1st) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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.