Were Hedge Funds Right About Ditching Domtar Corporation (UFS)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtDomtar Corporation (NYSE:UFS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Domtar Corporation (NYSE:UFS) has experienced a decrease in enthusiasm from smart money lately. Our calculations also showed that UFS 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to view the fresh hedge fund action surrounding Domtar Corporation (NYSE:UFS).

How have hedgies been trading Domtar Corporation (NYSE:UFS)?

Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -31% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards UFS over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Millennium Management held the most valuable stake in Domtar Corporation (NYSE:UFS), which was worth $20 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $17.2 million worth of shares. Arrowstreet Capital, Carlson Capital, and Two Sigma Advisors 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 Jade Capital Advisors allocated the biggest weight to Domtar Corporation (NYSE:UFS), around 1.5% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, dishing out 0.3 percent of its 13F equity portfolio to UFS.

Seeing as Domtar Corporation (NYSE:UFS) has faced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of hedgies that decided to sell off their positions entirely in the first quarter. Interestingly, Donald Sussman’s Paloma Partners said goodbye to the biggest stake of all the hedgies followed by Insider Monkey, comprising close to $1.4 million in stock. Minhua Zhang’s fund, Weld Capital Management, also dumped its stock, about $1.1 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 8 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to Domtar Corporation (NYSE:UFS). These stocks are CareTrust REIT Inc (NASDAQ:CTRE), Pacira Biosciences Inc (NASDAQ:PCRX), Alexander’s, Inc. (NYSE:ALX), and Chesapeake Utilities Corporation (NYSE:CPK). This group of stocks’ market valuations resemble UFS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CTRE 7 19766 -6
PCRX 26 368951 -2
ALX 8 110151 -5
CPK 7 25946 -1
Average 12 131204 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $87 million in UFS’s case. Pacira Biosciences Inc (NASDAQ:PCRX) is the most popular stock in this table. On the other hand CareTrust REIT Inc (NASDAQ:CTRE) is the least popular one with only 7 bullish hedge fund positions. Domtar Corporation (NYSE:UFS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately UFS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on UFS were disappointed as the stock returned 4.8% during the same time period 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 many of these stocks already outperformed the market so far this year.

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