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Hedge Funds Have Never Been This Bullish On Donaldson Company, Inc. (DCI)

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 Donaldson Company, Inc. (NYSE:DCI) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Donaldson Company, Inc. (NYSE:DCI) worth your attention right now? Money managers were in a bullish mood. The number of bullish hedge fund positions increased by 7 lately. Donaldson Company, Inc. (NYSE:DCI) was in 27 hedge funds’ portfolios at the end of June. The all time high for this statistics is 25. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that DCI 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). There were 20 hedge funds in our database with DCI positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ian Wace Marshall Wace

Ian Wace of Marshall Wace

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a gander at the recent hedge fund action encompassing Donaldson Company, Inc. (NYSE:DCI).

How have hedgies been trading Donaldson Company, Inc. (NYSE:DCI)?

At the end of June, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 35% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in DCI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Impax Asset Management held the most valuable stake in Donaldson Company, Inc. (NYSE:DCI), which was worth $47 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $41.2 million worth of shares. Arrowstreet Capital, GAMCO Investors, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Fairpointe Capital allocated the biggest weight to Donaldson Company, Inc. (NYSE:DCI), around 2.46% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, setting aside 0.52 percent of its 13F equity portfolio to DCI.

With a general bullishness amongst the heavyweights, key hedge funds have jumped into Donaldson Company, Inc. (NYSE:DCI) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, assembled the largest position in Donaldson Company, Inc. (NYSE:DCI). Adage Capital Management had $41.2 million invested in the company at the end of the quarter. Thyra Zerhusen’s Fairpointe Capital also initiated a $16.9 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace’s Marshall Wace LLP, Renaissance Technologies, and Michael Gelband’s ExodusPoint Capital.

Let’s check out hedge fund activity in other stocks similar to Donaldson Company, Inc. (NYSE:DCI). We will take a look at Sensata Technologies Holding plc (NYSE:ST), Santander Consumer USA Holdings Inc (NYSE:SC), Bunge Limited (NYSE:BG), Aluminum Corp. of China Limited (NYSE:ACH), Store Capital Corporation (NYSE:STOR), Schrodinger, Inc. (NASDAQ:SDGR), and Healthcare Trust Of America Inc (NYSE:HTA). All of these stocks’ market caps are closest to DCI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ST 33 1073165 7
SC 20 561451 0
BG 37 620306 -2
ACH 6 3451 4
STOR 16 689832 -9
SDGR 15 1099632 0
HTA 16 163019 0
Average 20.4 601551 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.4 hedge funds with bullish positions and the average amount invested in these stocks was $602 million. That figure was $226 million in DCI’s case. Bunge Limited (NYSE:BG) is the most popular stock in this table. On the other hand Aluminum Corp. of China Limited (NYSE:ACH) is the least popular one with only 6 bullish hedge fund positions. Donaldson Company, Inc. (NYSE:DCI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DCI is 73.9. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately DCI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DCI were disappointed as the stock returned -0.8% 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.