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Were Hedge Funds Right About Flocking Into Domtar Corporation (UFS) ?

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Domtar Corporation (NYSE:UFS).

Is Domtar Corporation (NYSE:UFS) the right investment to pursue these days? Money managers are getting more bullish. The number of bullish hedge fund bets improved by 3 lately. Our calculations also showed that UFS isn’t among the 30 most popular stocks among hedge funds. UFS was in 25 hedge funds’ portfolios at the end of December. There were 22 hedge funds in our database with UFS positions at the end of the previous quarter.

To the average investor there are dozens of gauges shareholders can use to assess stocks. A pair of the less known gauges are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the top picks of the best money managers can outpace their index-focused peers by a very impressive amount (see the details here).

Clint Carlson, Carlson Capital

We’re going to take a glance at the recent hedge fund action surrounding Domtar Corporation (NYSE:UFS).

How are hedge funds trading Domtar Corporation (NYSE:UFS)?

At Q4’s end, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in UFS 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.

UFS_apr2019

The largest stake in Domtar Corporation (NYSE:UFS) was held by Citadel Investment Group, which reported holding $23.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $16 million position. Other investors bullish on the company included GLG Partners, Two Sigma Advisors, and Millennium Management.

Consequently, key money managers were leading the bulls’ herd. Renaissance Technologies, managed by Jim Simons, initiated the biggest position in Domtar Corporation (NYSE:UFS). Renaissance Technologies had $16 million invested in the company at the end of the quarter. Clint Carlson’s Carlson Capital also initiated a $1.8 million position during the quarter. The other funds with brand new UFS positions are Israel Englander’s Millennium Management, Matthew Hulsizer’s PEAK6 Capital Management, and Michael Gelband’s ExodusPoint Capital.

Let’s check out hedge fund activity in other stocks similar to Domtar Corporation (NYSE:UFS). These stocks are PolyOne Corporation (NYSE:POL), Columbia Property Trust Inc (NYSE:CXP), Brady Corp (NYSE:BRC), and Argo Group International Holdings, Ltd. (NYSE:ARGO). This group of stocks’ market values resemble UFS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
POL 19 87717 4
CXP 13 57056 0
BRC 20 219969 3
ARGO 13 163795 0
Average 16.25 132134 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $132 million. That figure was $103 million in UFS’s case. Brady Corp (NYSE:BRC) is the most popular stock in this table. On the other hand Columbia Property Trust Inc (NYSE:CXP) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Domtar Corporation (NYSE:UFS) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on UFS as the stock returned 36.6% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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