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Were Hedge Funds Right About Ditching Dorman Products Inc. (DORM)?

Is Dorman Products Inc. (NASDAQ:DORM) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Dorman Products Inc. (NASDAQ:DORM) worth your attention right now? The best stock pickers are selling. The number of bullish hedge fund positions were cut by 1 lately. Our calculations also showed that DORM isn’t among the 30 most popular stocks among hedge funds (see the video below). DORM was in 14 hedge funds’ portfolios at the end of the second quarter of 2019. There were 15 hedge funds in our database with DORM positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Martin Whitman Third Avenue Management Marty Whitman

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s go over the new hedge fund action surrounding Dorman Products Inc. (NASDAQ:DORM).

Hedge fund activity in Dorman Products Inc. (NASDAQ:DORM)

At Q2’s end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DORM over the last 16 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

DORM_oct2019

The largest stake in Dorman Products Inc. (NASDAQ:DORM) was held by Royce & Associates, which reported holding $46 million worth of stock at the end of March. It was followed by Third Avenue Management with a $3.8 million position. Other investors bullish on the company included Minerva Advisors, Horizon Asset Management, and Arrowstreet Capital.

Due to the fact that Dorman Products Inc. (NASDAQ:DORM) has experienced falling interest from the aggregate hedge fund industry, we can see that there lies a certain “tier” of money managers who sold off their positions entirely heading into Q3. Intriguingly, Sander Gerber’s Hudson Bay Capital Management sold off the biggest investment of the “upper crust” of funds followed by Insider Monkey, valued at about $3.8 million in stock, and Hoon Kim’s Quantinno Capital was right behind this move, as the fund sold off about $0.7 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 1 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Dorman Products Inc. (NASDAQ:DORM). These stocks are Uniqure NV (NASDAQ:QURE), BancorpSouth Bank (NYSE:BXS), AllianceBernstein Holding LP (NYSE:AB), and Glaukos Corporation (NYSE:GKOS). This group of stocks’ market values match DORM’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
QURE 34 892256 6
BXS 12 62543 3
AB 10 25072 2
GKOS 15 65405 0
Average 17.75 261319 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.75 hedge funds with bullish positions and the average amount invested in these stocks was $261 million. That figure was $65 million in DORM’s case. Uniqure NV (NASDAQ:QURE) is the most popular stock in this table. On the other hand AllianceBernstein Holding LP (NYSE:AB) is the least popular one with only 10 bullish hedge fund positions. Dorman Products Inc. (NASDAQ:DORM) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately DORM wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DORM investors were disappointed as the stock returned -8.7% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far in 2019.

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

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