Hedge Fund Sentiment Is Stagnant On Diamond Offshore Drilling Inc (DO)

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the third quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Diamond Offshore Drilling Inc (NYSE:DO) changed recently.

Diamond Offshore Drilling Inc (NYSE:DO) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 19 hedge funds’ portfolios at the end of September. At the end of this article we will also compare DO to other stocks including Murphy USA Inc. (NYSE:MUSA), AlarmCom Holdings Inc (NASDAQ:ALRM), and First Midwest Bancorp Inc (NASDAQ:FMBI) to get a better sense of its popularity.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.

Chuck Royce

Let’s take a look at the latest hedge fund action encompassing Diamond Offshore Drilling Inc (NYSE:DO).

What does the smart money think about Diamond Offshore Drilling Inc (NYSE:DO)?

At Q3’s end, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, representing no change from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DO over the last 13 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with DO Positions

More specifically, AQR Capital Management was the largest shareholder of Diamond Offshore Drilling Inc (NYSE:DO), with a stake worth $45.1 million reported as of the end of September. Trailing AQR Capital Management was Fisher Asset Management, which amassed a stake valued at $17.6 million. Arosa Capital Management, Royce & Associates, and Vertex One Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Diamond Offshore Drilling Inc (NYSE:DO) has faced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there were a few hedge funds that slashed their positions entirely last quarter. Intriguingly, William B. Gray’s Orbis Investment Management dumped the biggest stake of all the hedgies watched by Insider Monkey, comprising about $8.5 million in stock, and Richard Driehaus’s Driehaus Capital was right behind this move, as the fund cut about $2.8 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks similar to Diamond Offshore Drilling Inc (NYSE:DO). We will take a look at Murphy USA Inc. (NYSE:MUSA), AlarmCom Holdings Inc (NASDAQ:ALRM), First Midwest Bancorp Inc (NASDAQ:FMBI), and HMS Holdings Corp. (NASDAQ:HMSY). This group of stocks’ market caps resemble DO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MUSA 19 173066 3
ALRM 12 259097 -3
FMBI 8 67244 -3
HMSY 16 65374 5
Average 13.75 141195 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $141 million. That figure was $103 million in DO’s case. Murphy USA Inc. (NYSE:MUSA) is the most popular stock in this table. On the other hand First Midwest Bancorp Inc (NASDAQ:FMBI) is the least popular one with only 8 bullish hedge fund positions. Diamond Offshore Drilling Inc (NYSE:DO) 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 MUSA might be a better candidate to consider a long position.

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