Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.7% in the 12 months ending October 26 (including dividend payments). Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of June 2014) generated a return of 15.1% during the same 12-month period, with 53% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Dover Corporation (NYSE:DOV).
Is Dover Corporation (NYSE:DOV) going to take off soon? Money managers are taking a pessimistic view. The number of bullish hedge fund bets were trimmed by 1 recently. Our calculations also showed that DOV isn’t among the 30 most popular stocks among hedge funds. DOV was in 23 hedge funds’ portfolios at the end of the third quarter of 2018. There were 24 hedge funds in our database with DOV positions at the end of the previous quarter.
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.
We’re going to go over the new hedge fund action regarding Dover Corporation (NYSE:DOV).
What does the smart money think about Dover Corporation (NYSE:DOV)?
At the end of the third quarter, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DOV over the last 13 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
Among these funds, Pzena Investment Management held the most valuable stake in Dover Corporation (NYSE:DOV), which was worth $466.9 million at the end of the third quarter. On the second spot was Third Point which amassed $354.1 million worth of shares. Moreover, Citadel Investment Group, Permian Investment Partners, and Millennium Management were also bullish on Dover Corporation (NYSE:DOV), allocating a large percentage of their portfolios to this stock.
Due to the fact that Dover Corporation (NYSE:DOV) has faced falling interest from the smart money, it’s safe to say that there was a specific group of money managers who sold off their entire stakes heading into Q3. At the top of the heap, Curtis Macnguyen’s Ivory Capital (Investment Mgmt) said goodbye to the biggest position of the 700 funds tracked by Insider Monkey, comprising an estimated $35.6 million in stock, and Clint Murray’s Lodge Hill Capital was right behind this move, as the fund dumped about $17.3 million worth. These moves are important to note, as aggregate hedge fund interest fell by 1 funds heading into Q3.
Let’s now take a look at hedge fund activity in other stocks similar to Dover Corporation (NYSE:DOV). We will take a look at Mohawk Industries, Inc. (NYSE:MHK), ZTO Express (Cayman) Inc. (NYSE:ZTO), Henry Schein, Inc. (NASDAQ:HSIC), and J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT). All of these stocks’ market caps are closest to DOV’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 28 hedge funds with bullish positions and the average amount invested in these stocks was $1.25 billion. That figure was $1.25 billion in DOV’s case. Mohawk Industries, Inc. (NYSE:MHK) is the most popular stock in this table. On the other hand ZTO Express (Cayman) Inc. (NYSE:ZTO) is the least popular one with only 12 bullish hedge fund positions. Dover Corporation (NYSE:DOV) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard MHK might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.