In this article we will analyze whether Discover Financial Services (NYSE:DFS) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market by double digits annually.
Is DFS a good stock to buy now? Discover Financial Services (NYSE:DFS) has experienced an increase in activity from the world’s largest hedge funds lately. Discover Financial Services (NYSE:DFS) was in 47 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 52. There were 44 hedge funds in our database with DFS holdings at the end of June. Our calculations also showed that DFS isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 66 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.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this cannabis tech stock right now. We go through lists like the 15 best blue chip stocks to buy 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. Keeping this in mind let’s check out the key hedge fund action surrounding Discover Financial Services (NYSE:DFS).
Do Hedge Funds Think DFS Is A Good Stock To Buy Now?
At the end of September, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from one quarter earlier. On the other hand, there were a total of 41 hedge funds with a bullish position in DFS 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.
According to Insider Monkey’s hedge fund database, Eashwar Krishnan’s Tybourne Capital Management has the most valuable position in Discover Financial Services (NYSE:DFS), worth close to $290.7 million, accounting for 7.2% of its total 13F portfolio. Sitting at the No. 2 spot is Windacre Partnership, managed by Snehal Amin, which holds a $278.5 million position; 8.5% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors with similar optimism include Ricky Sandler’s Eminence Capital, Ike Kier and Ilya Zaides’s KG Funds Management and Steven Richman’s East Side Capital (RR Partners). In terms of the portfolio weights assigned to each position KG Funds Management allocated the biggest weight to Discover Financial Services (NYSE:DFS), around 11.54% of its 13F portfolio. Windacre Partnership is also relatively very bullish on the stock, setting aside 8.48 percent of its 13F equity portfolio to DFS.
Now, specific money managers have jumped into Discover Financial Services (NYSE:DFS) headfirst. Windacre Partnership, managed by Snehal Amin, created the most outsized position in Discover Financial Services (NYSE:DFS). Windacre Partnership had $278.5 million invested in the company at the end of the quarter. Ricky Sandler’s Eminence Capital also initiated a $103.6 million position during the quarter. The other funds with brand new DFS positions are Andrew Kurita’s Kettle Hill Capital Management, Rob Citrone’s Discovery Capital Management, and Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors.
Let’s check out hedge fund activity in other stocks similar to Discover Financial Services (NYSE:DFS). We will take a look at Valero Energy Corporation (NYSE:VLO), Coca-Cola European Partners plc (NYSE:CCEP), CMS Energy Corporation (NYSE:CMS), CGI Inc. (NYSE:GIB), Conagra Brands, Inc. (NYSE:CAG), Restaurant Brands International Inc (NYSE:QSR), and Canon Inc. (NYSE:CAJ). This group of stocks’ market valuations are closest to DFS’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 26.4 hedge funds with bullish positions and the average amount invested in these stocks was $690 million. That figure was $1121 million in DFS’s case. Valero Energy Corporation (NYSE:VLO) is the most popular stock in this table. On the other hand Canon Inc. (NYSE:CAJ) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Discover Financial Services (NYSE:DFS) is more popular among hedge funds. Our overall hedge fund sentiment score for DFS is 85.1. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 32.9% in 2020 through December 8th but still managed to beat the market by 16.2 percentage points. Hedge funds were also right about betting on DFS as the stock returned 42.6% since the end of September (through 12/8) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.