In this article we will check out the progression of hedge fund sentiment towards DCP Midstream LP (NYSE:DCP) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
DCP Midstream LP (NYSE:DCP) has seen a decrease in activity from the world’s largest hedge funds of late. Our calculations also showed that DCP isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 44 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 leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a look at the latest hedge fund action surrounding DCP Midstream LP (NYSE:DCP).
What does smart money think about DCP Midstream LP (NYSE:DCP)?
At the end of the first quarter, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from one quarter earlier. By comparison, 2 hedge funds held shares or bullish call options in DCP a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital has the biggest position in DCP Midstream LP (NYSE:DCP), worth close to $3.4 million, amounting to less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is Ken Griffin of Citadel Investment Group, with a $2.6 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining peers with similar optimism include Paul Marshall and Ian Wace’s Marshall Wace LLP, Henry Breck’s Heronetta Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Heronetta Management allocated the biggest weight to DCP Midstream LP (NYSE:DCP), around 0.77% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, designating 0.01 percent of its 13F equity portfolio to DCP.
Judging by the fact that DCP Midstream LP (NYSE:DCP) has experienced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of funds who were dropping their full holdings by the end of the third quarter. It’s worth mentioning that Richard Driehaus’s Driehaus Capital dumped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $0.9 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also dropped its stock, about $0.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 2 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as DCP Midstream LP (NYSE:DCP) but similarly valued. These stocks are Cango Inc. (NYSE:CANG), 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS), Sunnova Energy International Inc. (NYSE:NOVA), and Hercules Capital, Inc. (NYSE:HTGC). This group of stocks’ market caps are closest to DCP’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 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $43 million. That figure was $7 million in DCP’s case. 1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) is the most popular stock in this table. On the other hand Cango Inc. (NYSE:CANG) is the least popular one with only 1 bullish hedge fund positions. DCP Midstream LP (NYSE:DCP) is not the least popular stock in this group but hedge fund interest is still below average. 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on DCP as the stock returned 181.2% during the second quarter and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.