We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Designer Brands Inc. (NYSE:DBI) and determine whether hedge funds skillfully traded this stock.
Is Designer Brands Inc. (NYSE:DBI) undervalued? Money managers were reducing their bets on the stock. The number of long hedge fund bets shrunk by 1 recently. Our calculations also showed that DBI isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s take a glance at the new hedge fund action encompassing Designer Brands Inc. (NYSE:DBI).
How have hedgies been trading Designer Brands Inc. (NYSE:DBI)?
At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from one quarter earlier. By comparison, 19 hedge funds held shares or bullish call options in DBI a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Royce & Associates was the largest shareholder of Designer Brands Inc. (NYSE:DBI), with a stake worth $7.8 million reported as of the end of September. Trailing Royce & Associates was Masters Capital Management, which amassed a stake valued at $3.5 million. Skylands Capital, Renaissance Technologies, and Masters Capital Management 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 Pacifica Capital Investments allocated the biggest weight to Designer Brands Inc. (NYSE:DBI), around 1.36% of its 13F portfolio. Skylands Capital is also relatively very bullish on the stock, setting aside 0.61 percent of its 13F equity portfolio to DBI.
Due to the fact that Designer Brands Inc. (NYSE:DBI) has faced a decline in interest from hedge fund managers, we can see that there lies a certain “tier” of hedgies that decided to sell off their positions entirely by the end of the first quarter. At the top of the heap, George McCabe’s Portolan Capital Management dumped the biggest stake of all the hedgies monitored by Insider Monkey, valued at close to $6.7 million in stock, and Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management was right behind this move, as the fund dropped about $2.3 million worth. These moves are important to note, as total hedge fund interest dropped by 1 funds by the end of the first quarter.
Let’s now review hedge fund activity in other stocks similar to Designer Brands Inc. (NYSE:DBI). We will take a look at Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX), Star Group L.P. (NYSE:SGU), Rubius Therapeutics, Inc. (NASDAQ:RUBY), and Catchmark Timber Trust Inc (NYSE:CTT). This group of stocks’ market valuations are closest to DBI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CRNX | 11 | 166354 | -1 |
| SGU | 8 | 65781 | 1 |
| RUBY | 4 | 878 | -1 |
| CTT | 11 | 41172 | -4 |
| Average | 8.5 | 68546 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $29 million in DBI’s case. Crinetics Pharmaceuticals, Inc. (NASDAQ:CRNX) is the most popular stock in this table. On the other hand Rubius Therapeutics, Inc. (NASDAQ:RUBY) is the least popular one with only 4 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 18.6% in 2020 through July 27th and still beat the market by 17.1 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 20.5% since the end of the first quarter 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.
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Disclosure: None. This article was originally published at Insider Monkey.
