Do Hedge Funds Love Discovery Inc. (DISCA)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of Discovery Inc. (NASDAQ:DISCA).

Discovery Inc. (NASDAQ:DISCA) has experienced a decrease in activity from the world’s largest hedge funds of late. DISCA was in 32 hedge funds’ portfolios at the end of March. There were 38 hedge funds in our database with DISCA holdings at the end of the previous quarter. Our calculations also showed that DISCA 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.

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 51 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.

Michael Burry Scion Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. 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 the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s check out the new hedge fund action surrounding Discovery Inc. (NASDAQ:DISCA).

What does smart money think about Discovery Inc. (NASDAQ:DISCA)?

Heading into the second quarter of 2020, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DISCA over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Is DISCA A Good Stock To Buy?

The largest stake in Discovery Inc. (NASDAQ:DISCA) was held by Citadel Investment Group, which reported holding $63.9 million worth of stock at the end of September. It was followed by GoldenTree Asset Management with a $34.3 million position. Other investors bullish on the company included Miller Value Partners, GAMCO Investors, and Zimmer Partners. In terms of the portfolio weights assigned to each position Scion Asset Management allocated the biggest weight to Discovery Inc. (NASDAQ:DISCA), around 7.92% of its 13F portfolio. GoldenTree Asset Management is also relatively very bullish on the stock, setting aside 6.35 percent of its 13F equity portfolio to DISCA.

Due to the fact that Discovery Inc. (NASDAQ:DISCA) has experienced a decline in interest from the smart money, it’s easy to see that there is a sect of fund managers who sold off their entire stakes in the first quarter. It’s worth mentioning that D. E. Shaw’s D E Shaw said goodbye to the largest position of the 750 funds tracked by Insider Monkey, totaling about $13.7 million in stock. Avi Fruchter’s fund, Anavon Capital, also dropped its stock, about $7.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 6 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Discovery Inc. (NASDAQ:DISCA) but similarly valued. These stocks are GSX Techedu Inc. (NYSE:GSX), KeyCorp (NYSE:KEY), HEICO Corporation (NYSE:HEI), and TELUS Corporation (NYSE:TU). This group of stocks’ market caps match DISCA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GSX 13 204210 3
KEY 43 348822 7
HEI 39 602163 -18
TU 15 197962 2
Average 27.5 338289 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $338 million. That figure was $233 million in DISCA’s case. KeyCorp (NYSE:KEY) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 13 bullish hedge fund positions. Discovery Inc. (NASDAQ:DISCA) 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. 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately DISCA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DISCA were disappointed as the stock returned 11.9% during the same time period 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 many of these stocks already outperformed the market so far this year.

Follow Warner Bros. Discovery Inc. (NASDAQ:WBD)

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