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Hedge Funds Were Dumping Donaldson Company, Inc. (DCI) Before The Coronavirus

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Donaldson Company, Inc. (NYSE:DCI), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is Donaldson Company, Inc. (NYSE:DCI) a marvelous investment now? Money managers are in a bearish mood. The number of bullish hedge fund positions were cut by 3 in recent months. Our calculations also showed that DCI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). DCI was in 21 hedge funds’ portfolios at the end of December. There were 24 hedge funds in our database with DCI holdings at the end of the previous quarter.

Today there are dozens of indicators investors employ to value stocks. A couple of the less known indicators are hedge fund and insider trading sentiment. We have shown that, historically, those who follow the best picks of the elite hedge fund managers can outpace the broader indices by a solid amount (see the details here).

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a look at the key hedge fund action surrounding Donaldson Company, Inc. (NYSE:DCI).

How are hedge funds trading Donaldson Company, Inc. (NYSE:DCI)?

At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DCI over the last 18 quarters. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

More specifically, Impax Asset Management was the largest shareholder of Donaldson Company, Inc. (NYSE:DCI), with a stake worth $50.1 million reported as of the end of September. Trailing Impax Asset Management was GAMCO Investors, which amassed a stake valued at $44.8 million. Arrowstreet Capital, Millennium Management, and Citadel Investment Group 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 Impax Asset Management allocated the biggest weight to Donaldson Company, Inc. (NYSE:DCI), around 0.56% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, dishing out 0.43 percent of its 13F equity portfolio to DCI.

Seeing as Donaldson Company, Inc. (NYSE:DCI) has witnessed declining sentiment from the smart money, logic holds that there were a few fund managers that elected to cut their full holdings last quarter. Interestingly, Donald Sussman’s Paloma Partners dumped the largest stake of the 750 funds watched by Insider Monkey, worth an estimated $1.4 million in stock. D. E. Shaw’s fund, D E Shaw, also cut its stock, about $1.4 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Donaldson Company, Inc. (NYSE:DCI). These stocks are Woori Financial Group Inc. (NYSE:WF), Nielsen Holdings plc (NYSE:NLSN), TCF Financial Corporation (NASDAQ:TCF), and Axalta Coating Systems Ltd (NYSE:AXTA). All of these stocks’ market caps match DCI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WF 3 3750 0
NLSN 29 1163597 -5
TCF 24 237950 -7
AXTA 60 1990462 0
Average 29 848940 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $849 million. That figure was $175 million in DCI’s case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand Woori Financial Group Inc. (NYSE:WF) is the least popular one with only 3 bullish hedge fund positions. Donaldson Company, Inc. (NYSE:DCI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately DCI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DCI investors were disappointed as the stock returned -33.2% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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