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Have Hedge Funds Found DSW Inc. (DSW)’s Perfect Re-Entry Point?

Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.

Is DSW Inc. (NYSE:DSW) a great investment now? Investors who are in the know are turning bullish. The number of long hedge fund positions moved up by 6 in recent months. At the end of this article we will also compare DSW to other stocks including Innocoll AG (NASDAQ:INNL), Insulet Corporation (NASDAQ:PODD), and Luxoft Holding Inc (NYSE:LXFT) to get a better sense of its popularity.

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At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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How have hedgies been trading DSW Inc. (NYSE:DSW)?

At Q3’s end, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a 38% jump from the previous quarter, though that followed a three quarter stretch of falling ownership of the stock. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

HedgeFundSentimentChart

When looking at the institutional investors followed by Insider Monkey, Greenlight Capital, managed by David Einhorn, holds the number one position in DSW Inc. (NYSE:DSW). Greenlight Capital has a $73.2 million position in the stock, comprising 1.4% of its 13F portfolio. On Greenlight Capital’s heels is Royce & Associates, led by Chuck Royce, holding a $49.4 million position. Remaining members of the smart money that hold long positions encompass Phill Gross and Robert Atchinson’s Adage Capital Management, Gilchrist Berg’s Water Street Capital and Israel Englander’s Millennium Management.

As industry-wide interest jumped, specific money managers were breaking ground themselves. Adage Capital Management assembled the largest position in DSW Inc. (NYSE:DSW). Adage Capital Management had $41 million invested in the company at the end of the quarter. Marc Majzner’s Clearline Capital also made a $3.6 million investment in the stock during the quarter. The following funds were also among the new DSW investors: Noam Gottesman’s GLG Partners, Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital, and Jim Simons’ Renaissance Technologies.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as DSW Inc. (NYSE:DSW) but similarly valued. These stocks are Innocoll AG (NASDAQ:INNL), Insulet Corporation (NASDAQ:PODD), Luxoft Holding Inc (NYSE:LXFT), and Cosan Limited (USA) (NYSE:CZZ). This group of stocks’ market caps resemble DSW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INNL 9 20536 -2
PODD 20 366551 0
LXFT 12 58124 -4
CZZ 23 168854 7

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $235 million in DSW’s case. Cosan Limited (USA) (NYSE:CZZ) is the most popular stock in this table. On the other hand Innocoll AG (NASDAQ:INNL) is the least popular one with only 9 bullish hedge fund positions. DSW Inc. (NYSE:DSW) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal, as we’d rather spend our time researching stocks that hedge funds are piling on. In this regard, both DSW and CZZ might be good candidates to consider taking long positions in.

Disclosure: None