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Were Hedge Funds Right About Dumping Dillard’s, Inc. (DDS)?

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 thoughtDillard’s, Inc. (NYSE:DDS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Dillard’s, Inc. (NYSE:DDS) was in 13 hedge funds’ portfolios at the end of the first quarter of 2020. DDS has experienced a decrease in hedge fund sentiment lately. There were 20 hedge funds in our database with DDS positions at the end of the previous quarter. Our calculations also showed that DDS 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.

If you’d ask most market participants, hedge funds are assumed to be worthless, outdated financial vehicles of the past. While there are more than 8000 funds trading at the moment, We choose to focus on the top tier of this group, approximately 850 funds. It is estimated that this group of investors direct the majority of the hedge fund industry’s total capital, and by following their top investments, Insider Monkey has determined several investment strategies that have historically beaten the market. Insider Monkey’s flagship short hedge fund strategy outperformed 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 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Lee Ainslie MAVERICK CAPITAL

Lee Ainslie of Maverick Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 8 states that allow euthanasia to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Now we’re going to take a peek at the latest hedge fund action encompassing Dillard’s, Inc. (NYSE:DDS).

How have hedgies been trading Dillard’s, Inc. (NYSE:DDS)?

At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -35% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DDS over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Southeastern Asset Management, managed by Mason Hawkins, holds the largest position in Dillard’s, Inc. (NYSE:DDS). Southeastern Asset Management has a $70.5 million position in the stock, comprising 1.7% of its 13F portfolio. Sitting at the No. 2 spot is AQR Capital Management, led by Cliff Asness, holding a $27.5 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions contain Stephen Mildenhall’s Contrarius Investment Management, Lee Ainslie’s Maverick Capital and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Contrarius Investment Management allocated the biggest weight to Dillard’s, Inc. (NYSE:DDS), around 2.03% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, dishing out 1.68 percent of its 13F equity portfolio to DDS.

Judging by the fact that Dillard’s, Inc. (NYSE:DDS) has witnessed bearish sentiment from the smart money, we can see that there is a sect of hedgies who sold off their positions entirely by the end of the first quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest investment of the 750 funds followed by Insider Monkey, totaling about $9.1 million in stock, and Daniel S. Och’s OZ Management was right behind this move, as the fund dropped about $8.4 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 7 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Dillard’s, Inc. (NYSE:DDS) but similarly valued. We will take a look at Diversified Healthcare Trust (NASDAQ:DHC), KKR Real Estate Finance Trust Inc. (NYSE:KREF), SunPower Corporation (NASDAQ:SPWR), and Colony Capital Inc (NYSE:CLNY). This group of stocks’ market values are similar to DDS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DHC 10 12170 1
KREF 7 27093 -2
SPWR 14 26020 -1
CLNY 18 126527 -7
Average 12.25 47953 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $48 million. That figure was $125 million in DDS’s case. Colony Capital Inc (NYSE:CLNY) is the most popular stock in this table. On the other hand KKR Real Estate Finance Trust Inc. (NYSE:KREF) is the least popular one with only 7 bullish hedge fund positions. Dillard’s, Inc. (NYSE:DDS) 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 13.3% in 2020 through June 25th but beat the market by 16.8 percentage points. Unfortunately DDS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DDS were disappointed as the stock returned -32.8% 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.