Is Digi International Inc. (DGII) A Good Long-Term Holding?

The Insider Monkey team has completed processing the quarterly 13F filings for the September quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge funds have been producing disappointing net returns in recent years, however that was partly due to the poor performance of small-cap stocks in general. Well, small-cap stocks finally turned the corner and have been beating the large-cap stocks by more than 10 percentage points over the last 5 months.This means the relevancy of hedge funds’ public filings became inarguable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards Digi International Inc. (NASDAQ:DGII).

Is Digi International Inc. (NASDAQ:DGII) ready to rally soon? The best stock pickers are taking a bearish view. The number of bullish hedge fund bets went down by 1 lately. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as AV Homes Inc (NASDAQ:AVHI), Consolidated-Tomoka Land Co. (NYSEAMEX:CTO), and Daktronics, Inc. (NASDAQ:DAKT) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

What have hedge funds been doing with Digi International Inc. (NASDAQ:DGII)?

Heading into the fourth quarter of 2016, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a 6% decline from one quarter earlier. The graph below displays the number of hedge funds with bullish positions in DGII over the last 5 quarters, which has remained in a narrow range throughout this year. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Royce & Associates, led by Chuck Royce, holds the biggest position in Digi International Inc. (NASDAQ:DGII). Royce & Associates has a $4.9 million position in the stock. On Royce & Associates’s heels is Ariel Investments, led by John W. Rogers, holding a $4 million position. Other professional money managers that hold long positions consist of Jim Simons’ Renaissance Technologies, Dacid E. Shaw’s D E Shaw, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

We view hedge fund activity in the stock as being unfavorable, but in this case there was only a single hedge fund selling its entire position: GRT Capital Partners. One hedge fund selling its entire position doesn’t always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don’t think this is the case in this case because none of the 700+ hedge funds tracked by Insider Monkey identified DGII as a viable investment and initiated a position in the stock.

Let’s also examine hedge fund activity in other stocks similar to Digi International Inc. (NASDAQ:DGII). These stocks are AV Homes Inc (NASDAQ:AVHI), Consolidated-Tomoka Land Co. (NYSEAMEX:CTO), Daktronics, Inc. (NASDAQ:DAKT), and Enzo Biochem, Inc. (NYSE:ENZ). This group of stocks’ market values match DGII’s market value.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $45 million. That figure was $21 million in DGII’s case. Daktronics, Inc. (NASDAQ:DAKT) is the most popular stock in this table. On the other hand AV Homes Inc (NASDAQ:AVHI) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Digi International Inc. (NASDAQ:DGII) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers and hedge funds seem to view it as a good long-term holding, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

Disclosure: None