Were These Hedge Funds Wrong About Dumping DaVita Inc (DVA)?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to DaVita Inc (NYSE:DVA) changed recently.

Is DaVita Inc (NYSE:DVA) undervalued? The smart money was reducing their bets on the stock. The number of long hedge fund bets dropped by 8 recently. DaVita Inc (NYSE:DVA) was in 35 hedge funds’ portfolios at the end of June. The all time high for this statistics is 43. Our calculations also showed that DVA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 43 hedge funds in our database with DVA positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest insurance companies to identify fast growing companies in various industries. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a peek at the fresh hedge fund action surrounding DaVita Inc (NYSE:DVA).

How have hedgies been trading DaVita Inc (NYSE:DVA)?

At Q2’s end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DVA over the last 20 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.

When looking at the institutional investors followed by Insider Monkey, Warren Buffett’s Berkshire Hathaway has the biggest position in DaVita Inc (NYSE:DVA), worth close to $3.0149 billion, comprising 1.5% of its total 13F portfolio. The second largest stake is held by PAR Capital Management, managed by Paul Reeder and Edward Shapiro, which holds a $165.5 million position; the fund has 6.4% of its 13F portfolio invested in the stock. Other peers that hold long positions contain Pedro Escudero’s DPM Capital, Jeffrey Gates’s Gates Capital Management and Larry Robbins’s Glenview Capital. In terms of the portfolio weights assigned to each position DPM Capital allocated the biggest weight to DaVita Inc (NYSE:DVA), around 64.21% of its 13F portfolio. PAR Capital Management is also relatively very bullish on the stock, designating 6.35 percent of its 13F equity portfolio to DVA.

Because DaVita Inc (NYSE:DVA) has experienced a decline in interest from the aggregate hedge fund industry, we can see that there lies a certain “tier” of funds that elected to cut their positions entirely heading into Q3. At the top of the heap, Michael Rockefeller and KarláKroeker’s Woodline Partners said goodbye to the largest investment of the “upper crust” of funds monitored by Insider Monkey, valued at an estimated $9.2 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund said goodbye to about $4.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 8 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as DaVita Inc (NYSE:DVA) but similarly valued. We will take a look at The AES Corporation (NYSE:AES), CNH Industrial NV (NYSE:CNHI), WPP Plc (NYSE:WPP), Live Nation Entertainment, Inc. (NYSE:LYV), Avery Dennison Corporation (NYSE:AVY), Packaging Corporation Of America (NYSE:PKG), and Eastman Chemical Company (NYSE:EMN). This group of stocks’ market caps are closest to DVA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AES 31 564378 0
CNHI 17 205909 0
WPP 9 34980 4
LYV 44 1194049 -2
AVY 29 175959 11
PKG 25 101486 2
EMN 27 184901 -2
Average 26 351666 1.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $352 million. That figure was $3678 million in DVA’s case. Live Nation Entertainment, Inc. (NYSE:LYV) is the most popular stock in this table. On the other hand WPP Plc (NYSE:WPP) is the least popular one with only 9 bullish hedge fund positions. DaVita Inc (NYSE:DVA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DVA is 58.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on DVA, though not to the same extent, as the stock returned 9% since Q2 (through October 30th) and outperformed the market as well.

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