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Should You Avoid Dollar Tree, Inc. (DLTR)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Dollar Tree, Inc. (NASDAQ:DLTR).

Is Dollar Tree, Inc. (NASDAQ:DLTR) undervalued? Hedge funds are becoming less hopeful. The number of long hedge fund bets shrunk by 1 recently. Our calculations also showed that DLTR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

To most market participants, hedge funds are assumed to be unimportant, outdated investment vehicles of yesteryear. While there are greater than 8000 funds in operation today, Our researchers choose to focus on the masters of this club, around 850 funds. These hedge fund managers orchestrate most of the smart money’s total asset base, and by monitoring their unrivaled equity investments, Insider Monkey has spotted various investment strategies that have historically defeated the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Gabriel Plotkin Melvin Capital Management

Gabriel Plotkin of Melvin Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we’re going to review the fresh hedge fund action surrounding Dollar Tree, Inc. (NASDAQ:DLTR).

How have hedgies been trading Dollar Tree, Inc. (NASDAQ:DLTR)?

At the end of the fourth quarter, a total of 51 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the third quarter of 2019. On the other hand, there were a total of 53 hedge funds with a bullish position in DLTR a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

More specifically, Akre Capital Management was the largest shareholder of Dollar Tree, Inc. (NASDAQ:DLTR), with a stake worth $478.2 million reported as of the end of September. Trailing Akre Capital Management was Rivulet Capital, which amassed a stake valued at $177.6 million. Palestra Capital Management, Point72 Asset Management, and Melvin Capital 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 Rivulet Capital allocated the biggest weight to Dollar Tree, Inc. (NASDAQ:DLTR), around 15.73% of its 13F portfolio. Sunriver Management is also relatively very bullish on the stock, earmarking 6.2 percent of its 13F equity portfolio to DLTR.

Because Dollar Tree, Inc. (NASDAQ:DLTR) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few hedge funds who were dropping their entire stakes by the end of the third quarter. Intriguingly, Renaissance Technologies said goodbye to the largest position of the 750 funds watched by Insider Monkey, comprising an estimated $121.1 million in stock. John Overdeck and David Siegel’s fund, Two Sigma Advisors, also said goodbye to its stock, about $90.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Dollar Tree, Inc. (NASDAQ:DLTR). These stocks are American Water Works Company, Inc. (NYSE:AWK), Fresenius Medical Care AG & Co. KGaA (NYSE:FMS), Corteva, Inc. (NYSE:CTVA), and ANSYS, Inc. (NASDAQ:ANSS). All of these stocks’ market caps resemble DLTR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AWK 29 625913 -11
FMS 11 13249 6
CTVA 27 676056 -10
ANSS 33 1348315 0
Average 25 665883 -3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $666 million. That figure was $1620 million in DLTR’s case. ANSYS, Inc. (NASDAQ:ANSS) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Dollar Tree, Inc. (NASDAQ:DLTR) is more popular among hedge funds. 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 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but still managed to beat the market by 1.9 percentage points. Hedge funds were also right about betting on DLTR as the stock returned -11.2% so far in Q1 (through March 9th) 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.

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