We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Digi International Inc. (NASDAQ:DGII) and determine whether hedge funds skillfully traded this stock.
Is Digi International Inc. (NASDAQ:DGII) a cheap investment right now? The best stock pickers were taking a pessimistic view. The number of long hedge fund bets went down by 4 in recent months. Our calculations also showed that DGII 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). DGII was in 11 hedge funds’ portfolios at the end of the first quarter of 2020. There were 15 hedge funds in our database with DGII holdings at the end of the previous quarter.
Video: Watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the new hedge fund action regarding Digi International Inc. (NASDAQ:DGII).
What have hedge funds been doing with Digi International Inc. (NASDAQ:DGII)?
Heading into the second quarter of 2020, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from one quarter earlier. By comparison, 15 hedge funds held shares or bullish call options in DGII a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Royce & Associates, managed by Chuck Royce, holds the biggest position in Digi International Inc. (NASDAQ:DGII). Royce & Associates has a $12.9 million position in the stock, comprising 0.2% of its 13F portfolio. The second most bullish fund manager is Thomas Ellis and Todd Hammer of North Run Capital, with a $5.8 million position; the fund has 6.1% of its 13F portfolio invested in the stock. Other professional money managers that are bullish include Renaissance Technologies, Ian Simm’s Impax Asset Management and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position North Run Capital allocated the biggest weight to Digi International Inc. (NASDAQ:DGII), around 6.14% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, dishing out 0.18 percent of its 13F equity portfolio to DGII.
Judging by the fact that Digi International Inc. (NASDAQ:DGII) has experienced bearish sentiment from hedge fund managers, we can see that there was a specific group of funds that slashed their entire stakes by the end of the first quarter. Interestingly, Mark Broach’s Manatuck Hill Partners dropped the largest position of all the hedgies watched by Insider Monkey, totaling about $2.7 million in stock, and Peter Algert and Kevin Coldiron’s Algert Coldiron Investors was right behind this move, as the fund dumped about $0.8 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 4 funds by the end of the first quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Digi International Inc. (NASDAQ:DGII) but similarly valued. These stocks are ProQR Therapeutics NV (NASDAQ:PRQR), RBB Bancorp (NASDAQ:RBB), Diebold Nixdorf Incorporated (NYSE:DBD), and Golden Star Resources Ltd. (NYSE:GSS). This group of stocks’ market caps resemble DGII’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $30 million in DGII’s case. Diebold Nixdorf Incorporated (NYSE:DBD) is the most popular stock in this table. On the other hand Golden Star Resources Ltd. (NYSE:GSS) is the least popular one with only 6 bullish hedge fund positions. Digi International Inc. (NASDAQ:DGII) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on DGII, though not to the same extent, as the stock returned 22.1% during the second quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.