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Hedge Funds Aren’t Crazy About Dollar General Corp. (DG) Anymore

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Dollar General Corp. (NYSE:DG)? The smart money sentiment can provide an answer to this question.

Dollar General Corp. (NYSE:DG) was in 31 hedge funds’ portfolios at the end of the third quarter of 2018. DG has experienced a decrease in hedge fund sentiment recently. There were 35 hedge funds in our database with DG holdings at the end of the previous quarter. Our calculations also showed that DG isn’t among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

RENAISSANCE TECHNOLOGIES

We’re going to take a look at the recent hedge fund action encompassing Dollar General Corp. (NYSE:DG).

How have hedgies been trading Dollar General Corp. (NYSE:DG)?

At Q3’s end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from one quarter earlier. By comparison, 38 hedge funds held shares or bullish call options in DG heading into this year. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

DG_dec2018

The largest stake in Dollar General Corp. (NYSE:DG) was held by Orbis Investment Management, which reported holding $560.4 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $351 million position. Other investors bullish on the company included Renaissance Technologies, Appaloosa Management LP, and Millennium Management.

Seeing as Dollar General Corp. (NYSE:DG) has experienced a decline in interest from hedge fund managers, it’s easy to see that there was a specific group of hedge funds that elected to cut their entire stakes heading into Q3. Interestingly, Brandon Haley’s Holocene Advisors dumped the biggest investment of the 700 funds followed by Insider Monkey, worth about $93.9 million in call options. Robert Pohly’s fund, Samlyn Capital, also dumped its call options, about $49.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Dollar General Corp. (NYSE:DG) but similarly valued. We will take a look at Yum! Brands, Inc. (NYSE:YUM), Corning Incorporated (NYSE:GLW), Amphenol Corporation (NYSE:APH), and Archer Daniels Midland Company (NYSE:ADM). All of these stocks’ market caps are closest to DG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
YUM 30 810745 -1
GLW 27 373323 6
APH 25 471274 4
ADM 32 771684 11
Average 28.5 606757 5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $607 million. That figure was $1.62 billion in DG’s case. Archer Daniels Midland Company (NYSE:ADM) is the most popular stock in this table. On the other hand Amphenol Corporation (NYSE:APH) is the least popular one with only 25 bullish hedge fund positions. Dollar General Corp. (NYSE:DG) 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 ADM might be a better candidate to consider a long position.

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

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