Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Dover Corporation (NYSE:DOV) changed recently.
Dover Corporation (NYSE:DOV) investors should be aware of a decrease in enthusiasm from smart money in recent months. DOV was in 30 hedge funds’ portfolios at the end of the third quarter of 2019. There were 32 hedge funds in our database with DOV positions at the end of the previous quarter. Our calculations also showed that DOV isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to review the new hedge fund action encompassing Dover Corporation (NYSE:DOV).
What have hedge funds been doing with Dover Corporation (NYSE:DOV)?
At the end of the third quarter, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in DOV 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.
More specifically, Citadel Investment Group was the largest shareholder of Dover Corporation (NYSE:DOV), with a stake worth $278.6 million reported as of the end of September. Trailing Citadel Investment Group was Adage Capital Management, which amassed a stake valued at $144.5 million. Millennium Management, Scopus Asset Management, and Balyasny Asset Management 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 Albar Capital allocated the biggest weight to Dover Corporation (NYSE:DOV), around 4.14% of its portfolio. Scopus Asset Management is also relatively very bullish on the stock, earmarking 1.84 percent of its 13F equity portfolio to DOV.
Because Dover Corporation (NYSE:DOV) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there were a few hedgies who sold off their positions entirely heading into Q4. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest position of the “upper crust” of funds monitored by Insider Monkey, valued at an estimated $16.4 million in stock, and Nick Niell’s Arrowgrass Capital Partners was right behind this move, as the fund said goodbye to about $16 million worth. These moves are important to note, as total hedge fund interest was cut by 2 funds heading into Q4.
Let’s now review hedge fund activity in other stocks similar to Dover Corporation (NYSE:DOV). These stocks are Align Technology, Inc. (NASDAQ:ALGN), MGM Resorts International (NYSE:MGM), ArcelorMittal (NYSE:MT), and Quest Diagnostics Incorporated (NYSE:DGX). This group of stocks’ market values match DOV’s market value.
|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 32.25 hedge funds with bullish positions and the average amount invested in these stocks was $1111 million. That figure was $731 million in DOV’s case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand ArcelorMittal (NYSE:MT) is the least popular one with only 14 bullish hedge fund positions. Dover Corporation (NYSE:DOV) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on DOV as the stock returned 12.5% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.