Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Domtar Corporation (NYSE:UFS).
Domtar Corporation (NYSE:UFS) has seen a decrease in hedge fund sentiment lately. Our calculations also showed that UFS isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to analyze the recent hedge fund action encompassing Domtar Corporation (NYSE:UFS).
How are hedge funds trading Domtar Corporation (NYSE:UFS)?
At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. By comparison, 25 hedge funds held shares or bullish call options in UFS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Domtar Corporation (NYSE:UFS), with a stake worth $42.9 million reported as of the end of March. Trailing Citadel Investment Group was AQR Capital Management, which amassed a stake valued at $23.5 million. GLG Partners, Renaissance Technologies, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.
Because Domtar Corporation (NYSE:UFS) has experienced a decline in interest from the smart money, we can see that there was a specific group of funds who were dropping their entire stakes heading into Q3. It’s worth mentioning that Matthew Hulsizer’s PEAK6 Capital Management dumped the biggest investment of all the hedgies tracked by Insider Monkey, valued at an estimated $1.5 million in stock. Andrew Feldstein and Stephen Siderow’s fund, Blue Mountain Capital, also cut its stock, about $1.2 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 1 funds heading into Q3.
Let’s go over hedge fund activity in other stocks similar to Domtar Corporation (NYSE:UFS). These stocks are Glaukos Corporation (NYSE:GKOS), AU Optronics Corp. (NYSE:AUO), SiteOne Landscape Supply, Inc. (NYSE:SITE), and Intelsat S.A. (NYSE:I). All of these stocks’ market caps are closest to UFS’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 19 hedge funds with bullish positions and the average amount invested in these stocks was $251 million. That figure was $140 million in UFS’s case. Intelsat S.A. (NYSE:I) is the most popular stock in this table. On the other hand AU Optronics Corp. (NYSE:AUO) is the least popular one with only 7 bullish hedge fund positions. Domtar Corporation (NYSE:UFS) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately UFS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); UFS investors were disappointed as the stock returned -18.8% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.