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 Donnelley Financial Solutions, Inc. (NYSE:DFIN) and determine whether hedge funds skillfully traded this stock.
Donnelley Financial Solutions, Inc. (NYSE:DFIN) was in 23 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 22. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. DFIN has seen an increase in hedge fund interest in recent months. There were 18 hedge funds in our database with DFIN positions at the end of the first quarter. Our calculations also showed that DFIN 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 lithium company which could also benefit from the electric car adoption. 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 look at the recent hedge fund action regarding Donnelley Financial Solutions, Inc. (NYSE:DFIN).
How are hedge funds trading Donnelley Financial Solutions, Inc. (NYSE:DFIN)?
At the end of June, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 28% from the first quarter of 2020. By comparison, 12 hedge funds held shares or bullish call options in DFIN a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Donnelley Financial Solutions, Inc. (NYSE:DFIN) was held by Simcoe Capital Management, which reported holding $27.7 million worth of stock at the end of September. It was followed by D E Shaw with a $6 million position. Other investors bullish on the company included Millennium Management, Marshall Wace LLP, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Simcoe Capital Management allocated the biggest weight to Donnelley Financial Solutions, Inc. (NYSE:DFIN), around 6.83% of its 13F portfolio. Proxima Capital Management is also relatively very bullish on the stock, earmarking 3.57 percent of its 13F equity portfolio to DFIN.
As one would reasonably expect, key hedge funds have been driving this bullishness. Proxima Capital Management, managed by Youlia Miteva, assembled the largest position in Donnelley Financial Solutions, Inc. (NYSE:DFIN). Proxima Capital Management had $0.7 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also made a $0.3 million investment in the stock during the quarter. The other funds with brand new DFIN positions are Donald Sussman’s Paloma Partners, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, and Thomas Bailard’s Bailard Inc.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Donnelley Financial Solutions, Inc. (NYSE:DFIN) but similarly valued. These stocks are Baytex Energy Corp (NYSE:BTE), ChromaDex Corporation (NASDAQ:CDXC), Peabody Energy Corporation (NYSE:BTU), Trilogy Metals Inc. (NYSE:TMQ), GameStop Corp. (NYSE:GME), Alexco Resource Corp. (NYSE:AXU), and Modine Manufacturing Company (NYSE:MOD). All of these stocks’ market caps are similar to DFIN’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 11.6 hedge funds with bullish positions and the average amount invested in these stocks was $40 million. That figure was $49 million in DFIN’s case. Peabody Energy Corporation (NYSE:BTU) is the most popular stock in this table. On the other hand Alexco Resource Corp. (NYSE:AXU) is the least popular one with only 5 bullish hedge fund positions. Donnelley Financial Solutions, Inc. (NYSE:DFIN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DFIN is 90. 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. 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 24.8% in 2020 through the end of third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on DFIN as the stock returned 59% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.