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Were Hedge Funds Right About DaVita Inc (DVA)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards DaVita Inc (NYSE:DVA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

DaVita Inc (NYSE:DVA) investors should pay attention to an increase in enthusiasm from smart money of late. DVA was in 43 hedge funds’ portfolios at the end of March. There were 38 hedge funds in our database with DVA positions at the end of the previous quarter. Our calculations also showed that DVA isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 58 percentage points since March 2017 (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.

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the new hedge fund action regarding DaVita Inc (NYSE:DVA).

What does smart money think about DaVita Inc (NYSE:DVA)?

At the end of the first quarter, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. By comparison, 36 hedge funds held shares or bullish call options in DVA a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Berkshire Hathaway held the most valuable stake in DaVita Inc (NYSE:DVA), which was worth $2897.5 million at the end of the third quarter. On the second spot was PAR Capital Management which amassed $316.3 million worth of shares. DPM Capital, Gates Capital Management, and Renaissance Technologies 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 DPM Capital allocated the biggest weight to DaVita Inc (NYSE:DVA), around 83.23% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, setting aside 13.43 percent of its 13F equity portfolio to DVA.

Consequently, specific money managers have jumped into DaVita Inc (NYSE:DVA) headfirst. Citadel Investment Group, managed by Ken Griffin, established the most valuable position in DaVita Inc (NYSE:DVA). Citadel Investment Group had $48.2 million invested in the company at the end of the quarter. Michael Rockefeller and KarláKroeker’s Woodline Partners also initiated a $9.2 million position during the quarter. The other funds with brand new DVA positions are Dmitry Balyasny’s Balyasny Asset Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Nathan Przybylo’s L2 Asset Management.

Let’s now review hedge fund activity in other stocks similar to DaVita Inc (NYSE:DVA). We will take a look at Masimo Corporation (NASDAQ:MASI), BeiGene, Ltd. (NASDAQ:BGNE), Qiagen NV (NYSE:QGEN), and NVR, Inc. (NYSE:NVR). This group of stocks’ market values are closest to DVA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MASI 31 156950 1
BGNE 11 2174312 -5
QGEN 30 341681 -21
NVR 34 744980 4
Average 26.5 854481 -5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $854 million. That figure was $3658 million in DVA’s case. NVR, Inc. (NYSE:NVR) is the most popular stock in this table. On the other hand BeiGene, Ltd. (NASDAQ:BGNE) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks DaVita Inc (NYSE:DVA) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately DVA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DVA were disappointed as the stock returned 4% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.