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Hedge Funds Soured On DXP Enterprises Inc (DXPE) A Bit Early

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like DXP Enterprises Inc (NASDAQ:DXPE).

DXP Enterprises Inc (NASDAQ:DXPE) investors should be aware of a decrease in hedge fund interest recently. DXPE was in 9 hedge funds’ portfolios at the end of the third quarter of 2019. There were 11 hedge funds in our database with DXPE holdings at the end of the previous quarter. Our calculations also showed that DXPE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.

Roger Ibbotson of Zebra Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. In December we recommended Adams Energy and the stock gained 20 percent. Let’s review the recent hedge fund action regarding DXP Enterprises Inc (NASDAQ:DXPE).

How are hedge funds trading DXP Enterprises Inc (NASDAQ:DXPE)?

Heading into the fourth quarter of 2019, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in DXPE a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management has the largest position in DXP Enterprises Inc (NASDAQ:DXPE), worth close to $55.6 million, comprising 2.1% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies, founded by Jim Simons, holding a $4.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining peers that are bullish encompass Cliff Asness’s AQR Capital Management, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Nantahala Capital Management allocated the biggest weight to DXP Enterprises Inc (NASDAQ:DXPE), around 2.06% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, designating 0.25 percent of its 13F equity portfolio to DXPE.

Since DXP Enterprises Inc (NASDAQ:DXPE) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there exists a select few hedgies who were dropping their positions entirely last quarter. At the top of the heap, Israel Englander’s Millennium Management dropped the biggest stake of all the hedgies watched by Insider Monkey, worth close to $4.9 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also said goodbye to its stock, about $0.8 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 2 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to DXP Enterprises Inc (NASDAQ:DXPE). These stocks are Quanterix Corporation (NASDAQ:QTRX), America’s Car-Mart, Inc. (NASDAQ:CRMT), Everi Holdings Inc (NYSE:EVRI), and Ellington Financial Inc. (NYSE:EFC). This group of stocks’ market valuations match DXPE’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
QTRX 10 42340 2
CRMT 21 87866 -2
EVRI 23 164371 -1
EFC 7 46892 -2
Average 15.25 85367 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $85 million. That figure was $63 million in DXPE’s case. Everi Holdings Inc (NYSE:EVRI) is the most popular stock in this table. On the other hand Ellington Financial Inc. (NYSE:EFC) is the least popular one with only 7 bullish hedge fund positions. DXP Enterprises Inc (NASDAQ:DXPE) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on DXPE as the stock returned 11% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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