Should You Buy Discovery Communications Inc. (DISCK)?

There are several ways to beat the market, and investing in small-cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Carl Icahn and George Soros think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small-cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other elite funds’ exemplary historical records, we pay attention to their small-cap picks. In this article, we use hedge fund filing data to analyze Discovery Communications Inc. (NASDAQ:DISCK).

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Discovery Communications Inc. was in 26 hedge funds’ portfolios at the end of the third quarter of 2015. Discovery Communications shareholders have witnessed an increase in activity from the world’s largest hedge funds of late. There were 25 hedge funds in our database with Discovery Communications holdings at the end of the previous quarter. At the end of this article we will also compare Discovery Communications to other stocks including Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), Marathon Oil Corporation (NYSE:MRO), and Xerox Corporation (NYSE:XRX) to get a better sense of its popularity.

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If you’d ask most shareholders, hedge funds are assumed to be underperforming, old investment tools of yesteryear. While there are greater than 8,000 funds in operation today, hedge fund experts at Insider Monkey hone in on the bigwigs of this club, approximately 700 funds. Most estimates calculate that this group of people command the lion’s share of all hedge funds’ total capital, and by keeping track of their first-class picks, Insider Monkey has spotted a number of investment strategies that have historically outperformed Mr. Market. Insider Monkey’s small-cap hedge fund strategy exceeded the S&P 500 index by 12 percentage points per annum for a decade in its backtests.

With all of this in mind, let’s check out the recent action regarding Discovery Communications Inc. (NASDAQ:DISCK).

How are hedge funds trading Discovery Communications Inc. (NASDAQ:DISCK)?

Heading into Q4, a total of 26 of the hedge funds tracked by Insider Monkey were long in this stock, a rise of 4% from the second quarter. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings significantly.

According to publicly available hedge fund holdings data compiled by Insider Monkey, Boykin Curry’s Eagle Capital Management has the biggest position in Discovery Communications Inc. (NASDAQ:DISCK), worth close to $82.2 million, accounting for 0.4% of its total 13F portfolio. The second-most bullish hedge fund manager is Manor Road Capital Partners, managed by John Ku, which holds a $72.3 million position; the fund has 14.1% of its 13F portfolio invested in the stock. Remaining hedge funds that are bullish include David E. Shaw’s D E Shaw, Mario Gabelli’s GAMCO Investors, and Wallace Weitz’s Wallace R. Weitz & Co..

As one would reasonably expect, specific money managers were breaking ground themselves. First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, created the most valuable position in Discovery Communications Inc. (NASDAQ:DISCK). First Pacific Advisors LLC had $6.6 million invested in the company at the end of the quarter. Joshua Nash’s Ulysses Management also initiated a $3.4 million position during the quarter. The following funds were also among the new Discovery Communications investors: Michael Platt and William Reeves’ BlueCrest Capital Mgmt., and Peter Algert and Kevin Coldiron’s Algert Coldiron Investors.

Let’s check out hedge fund activity in other stocks similar to Discovery Communications Inc. (NASDAQ:DISCK). We will take a look at Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), Marathon Oil Corporation (NYSE:MRO), Xerox Corporation (NYSE:XRX), and Textron Inc. (NYSE:TXT). This group of stocks’ market values are closest to DISCK’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ULTA 30 1878474 -2
MRO 34 429246 1
XRX 33 547895 3
TXT 26 688242 -7

As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $886 million, far more than the $372 million in Discovery Communications shares held by these investors. Marathon Oil Corporation (NYSE:MRO) is the most popular stock in this table. On the other hand Textron Inc. (NYSE:TXT) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Discovery Communications Inc. (NASDAQ:DISCK) is even less popular than Textron. Considering that hedge funds aren’t fond of this stock in relation to its peers, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock, owning just 3.60% of its shares.