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Discover Financial Services (DFS): Hedge Funds In Wait-and-See Mode

After several tireless days we have finished crunching the numbers from nearly 750 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms’ equity portfolios as of September 30th. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards Discover Financial Services (NYSE:DFS).

Discover Financial Services (NYSE:DFS) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that DFS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

According to most investors, hedge funds are viewed as slow, outdated investment vehicles of yesteryear. While there are greater than 8000 funds with their doors open at the moment, Our researchers look at the leaders of this group, around 750 funds. It is estimated that this group of investors direct the majority of all hedge funds’ total asset base, and by observing their best equity investments, Insider Monkey has unearthed many investment strategies that have historically defeated Mr. Market. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points a year since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the latest hedge fund action regarding Discover Financial Services (NYSE:DFS).

Hedge fund activity in Discover Financial Services (NYSE:DFS)

At Q3’s end, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 32 hedge funds with a bullish position in DFS a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

DFS_dec2019

More specifically, Diamond Hill Capital was the largest shareholder of Discover Financial Services (NYSE:DFS), with a stake worth $299.2 million reported as of the end of September. Trailing Diamond Hill Capital was AQR Capital Management, which amassed a stake valued at $153 million. Arrowstreet Capital, GLG Partners, and Balyasny Asset 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 Factorial Partners allocated the biggest weight to Discover Financial Services (NYSE:DFS), around 2.55% of its portfolio. Diamond Hill Capital is also relatively very bullish on the stock, earmarking 1.59 percent of its 13F equity portfolio to DFS.

Because Discover Financial Services (NYSE:DFS) has experienced a decline in interest from hedge fund managers, we can see that there exists a select few hedgies that slashed their positions entirely in the third quarter. Interestingly, Brandon Haley’s Holocene Advisors dumped the largest investment of the “upper crust” of funds watched by Insider Monkey, comprising close to $26.7 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also cut its stock, about $24.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 2 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Discover Financial Services (NYSE:DFS). These stocks are Cummins Inc. (NYSE:CMI), Coca-Cola European Partners plc (NYSE:CCEP), TD Ameritrade Holding Corp. (NASDAQ:AMTD), and Fiat Chrysler Automobiles NV (NYSE:FCAU). This group of stocks’ market caps are closest to DFS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CMI 31 857313 -14
CCEP 16 125523 6
AMTD 29 334275 7
FCAU 27 1493339 -1
Average 25.75 702613 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $703 million. That figure was $936 million in DFS’s case. Cummins Inc. (NYSE:CMI) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Discover Financial Services (NYSE:DFS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately DFS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DFS were disappointed as the stock returned 5.2% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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