Do Hedge Funds Love Discover Financial Services (DFS)?

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we follow the hedge fund activity in the small-cap space.

Is Discover Financial Services (NYSE:DFS) undervalued? Hedge funds are becoming more confident. The number of bullish hedge fund bets moved up by 2 lately. DFS was in 38 hedge funds’ portfolios at the end of the third quarter of 2016. There were 36 hedge funds in our database with DFS positions at the end of the previous quarter. At the end of this article we will also compare DFS to other stocks including Corning Incorporated (NYSE:GLW), Mylan Inc. (NASDAQ:MYL), and Aviva Plc (ADR) (NYSE:AV) to get a better sense of its popularity.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year, involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs.

Now, let’s take a look at the fresh action surrounding Discover Financial Services (NYSE:DFS).

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

At the end of the third quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, an increase of 6% from the previous quarter. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Cliff Asness’s AQR Capital Management has the biggest position in Discover Financial Services (NYSE:DFS), worth close to $135.4 million, amounting to 0.2% of its total 13F portfolio. On AQR Capital Management’s heels is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with an $85 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism encompass Martin D. Sass’s MD Sass, Phill Gross and Robert Atchinson’s Adage Capital Management and Israel Englander’s Millennium Management.

As one would reasonably expect, key hedge funds were breaking ground themselves. Stevens Capital Management, managed by Matthew Tewksbury, created the biggest position in Discover Financial Services (NYSE:DFS). The fund had $16.1 million invested in the company at the end of the quarter. Gregg Moskowitz’s Interval Partners also initiated a $12.4 million position during the quarter. The following funds were also among the new DFS investors: Ken Griffin’s Citadel Investment Group, Sharif Siddiqui’s Alpenglow Capital, and Alec Litowitz and Ross Laser’s Magnetar Capital.

Let’s check out hedge fund activity in other stocks similar to Discover Financial Services (NYSE:DFS). We will take a look at Corning Incorporated (NYSE:GLW), Mylan Inc. (NASDAQ:MYL), Aviva Plc (ADR) (NYSE:AV), and HP Inc. (NYSE:HPQ). This group of stocks’ market valuations match DFS’s market valuation.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $944 million. That figure was $671 million in DFS’s case. Mylan Inc. (NASDAQ:MYL) is the most popular stock in this table. On the other hand Aviva Plc (ADR) (NYSE:AV) is the least popular one with only 5 bullish hedge fund positions. Discover Financial Services (NYSE:DFS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard MYL might be a better candidate to consider a long position.

Disclosure: none.