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Did Hedge Funds Make The Right Call On Donaldson Company, Inc. (DCI) ?

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 Donaldson Company, Inc. (NYSE:DCI) and determine whether hedge funds skillfully traded this stock.

Donaldson Company, Inc. (NYSE:DCI) shareholders have witnessed a decrease in support from the world’s most elite money managers recently. Our calculations also showed that DCI 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.

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

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 tripled 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here.

With all of this in mind let’s take a look at the key hedge fund action encompassing Donaldson Company, Inc. (NYSE:DCI).

Hedge fund activity in Donaldson Company, Inc. (NYSE:DCI)

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DCI over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is DCI A Good Stock To Buy?

Among these funds, Impax Asset Management held the most valuable stake in Donaldson Company, Inc. (NYSE:DCI), which was worth $36.5 million at the end of the third quarter. On the second spot was GAMCO Investors which amassed $28.8 million worth of shares. Millennium Management, Arrowstreet Capital, and Citadel Investment Group 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 Cove Street Capital allocated the biggest weight to Donaldson Company, Inc. (NYSE:DCI), around 1.02% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, designating 0.49 percent of its 13F equity portfolio to DCI.

Because Donaldson Company, Inc. (NYSE:DCI) has faced a decline in interest from the smart money, it’s easy to see that there was a specific group of funds that decided to sell off their entire stakes in the first quarter. It’s worth mentioning that Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest investment of all the hedgies watched by Insider Monkey, worth about $3.1 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund cut about $2.9 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Donaldson Company, Inc. (NYSE:DCI) but similarly valued. These stocks are Grupo Aval Acciones y Valores S.A. (NYSE:AVAL), SolarWinds Corporation (NYSE:SWI), Hyatt Hotels Corporation (NYSE:H), and Casey’s General Stores, Inc. (NASDAQ:CASY). This group of stocks’ market values are similar to DCI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AVAL 5 10012 -2
SWI 14 2141429 -1
H 24 513510 -3
CASY 23 158620 1
Average 16.5 705893 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $706 million. That figure was $126 million in DCI’s case. Hyatt Hotels Corporation (NYSE:H) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 5 bullish hedge fund positions. Donaldson Company, Inc. (NYSE:DCI) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on DCI, though not to the same extent, as the stock returned 27% since the end of March and outperformed the market as well.

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