At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards DaVita Inc (NYSE:DVA) at the end of the second quarter and determine whether the smart money was really smart about this stock.
DaVita Inc (NYSE:DVA) investors should pay attention to a decrease in hedge fund interest in recent months. DaVita Inc (NYSE:DVA) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 43. There were 43 hedge funds in our database with DVA positions at the end of the first quarter. Our calculations also showed that DVA isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s review the recent hedge fund action surrounding DaVita Inc (NYSE:DVA).
What have hedge funds been doing with DaVita Inc (NYSE:DVA)?
At second quarter’s end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the previous quarter. By comparison, 36 hedge funds held shares or bullish call options in DVA 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.
The largest stake in DaVita Inc (NYSE:DVA) was held by Berkshire Hathaway, which reported holding $3014.9 million worth of stock at the end of September. It was followed by PAR Capital Management with a $165.5 million position. Other investors bullish on the company included DPM Capital, Gates Capital Management, and Glenview Capital. In terms of the portfolio weights assigned to each position DPM Capital allocated the biggest weight to DaVita Inc (NYSE:DVA), around 64.21% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, earmarking 6.35 percent of its 13F equity portfolio to DVA.
Judging by the fact that DaVita Inc (NYSE:DVA) has experienced declining sentiment from hedge fund managers, logic holds that there was a specific group of hedge funds that decided to sell off their full holdings in the second quarter. Interestingly, Michael Rockefeller and KarláKroeker’s Woodline Partners sold off the biggest investment of the “upper crust” of funds followed by Insider Monkey, comprising close to $9.2 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund dropped about $4.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest was cut by 8 funds in the second quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as DaVita Inc (NYSE:DVA) but similarly valued. These stocks are The AES Corporation (NYSE:AES), CNH Industrial NV (NYSE:CNHI), WPP Plc (NYSE:WPP), Live Nation Entertainment, Inc. (NYSE:LYV), Avery Dennison Corporation (NYSE:AVY), Packaging Corporation Of America (NYSE:PKG), and Eastman Chemical Company (NYSE:EMN). This group of stocks’ market values resemble DVA’s market value.
|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 26 hedge funds with bullish positions and the average amount invested in these stocks was $352 million. That figure was $3678 million in DVA’s case. Live Nation Entertainment, Inc. (NYSE:LYV) is the most popular stock in this table. On the other hand WPP Plc (NYSE:WPP) is the least popular one with only 9 bullish hedge fund positions. DaVita Inc (NYSE:DVA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DVA is 58.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately DVA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DVA were disappointed as the stock returned 9.6% 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.
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Disclosure: None. This article was originally published at Insider Monkey.