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Were Hedge Funds Right About Piling Into Dollar General Corp. (DG)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at 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. 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 we look at how hedge funds traded Dollar General Corp. (NYSE:DG) and determine whether the smart money was really smart about this stock.

Dollar General Corp. (NYSE:DG) was in 60 hedge funds’ portfolios at the end of March. DG shareholders have witnessed an increase in enthusiasm from smart money of late. There were 50 hedge funds in our database with DG holdings at the end of the previous quarter. Our calculations also showed that DG 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

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 take a glance at the recent hedge fund action encompassing Dollar General Corp. (NYSE:DG).

What does smart money think about Dollar General Corp. (NYSE:DG)?

At Q1’s end, a total of 60 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards DG over the last 18 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in Dollar General Corp. (NYSE:DG). Citadel Investment Group has a $215.3 million position in the stock, comprising 0.1% of its 13F portfolio. The second largest stake is held by AQR Capital Management, managed by Cliff Asness, which holds a $177.9 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining members of the smart money that are bullish include Renaissance Technologies, Brandon Haley’s Holocene Advisors and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position 12th Street Asset Management allocated the biggest weight to Dollar General Corp. (NYSE:DG), around 10.96% of its 13F portfolio. Emerson Point Capital is also relatively very bullish on the stock, setting aside 7.51 percent of its 13F equity portfolio to DG.

With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Suvretta Capital Management, managed by Aaron Cowen, assembled the most valuable position in Dollar General Corp. (NYSE:DG). Suvretta Capital Management had $77.2 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $69.5 million position during the quarter. The following funds were also among the new DG investors: Louis Bacon’s Moore Global Investments, Panayotis Takis Sparaggis’s Alkeon Capital Management, and Steven Boyd’s Armistice Capital.

Let’s go over hedge fund activity in other stocks similar to Dollar General Corp. (NYSE:DG). We will take a look at Ferrari N.V. (NYSE:RACE), Norfolk Southern Corp. (NYSE:NSC), BCE Inc. (NYSE:BCE), and Vodafone Group Plc (NASDAQ:VOD). This group of stocks’ market valuations are closest to DG’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RACE 29 1729509 -7
NSC 51 1172825 -1
BCE 13 204550 -6
VOD 14 598782 -2
Average 26.75 926417 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $926 million. That figure was $2103 million in DG’s case. Norfolk Southern Corp. (NYSE:NSC) is the most popular stock in this table. On the other hand BCE Inc. (NYSE:BCE) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Dollar General Corp. (NYSE:DG) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on DG as the stock returned 26.4% in Q2 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.

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