How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Domino's Pizza, Inc. (NYSE:DPZ) and determine whether hedge funds had an edge regarding this stock.
Domino's Pizza, Inc. (NYSE:DPZ) was in 47 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 41. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. DPZ has experienced an increase in activity from the world's largest hedge funds recently. There were 45 hedge funds in our database with DPZ positions at the end of the first quarter. Our calculations also showed that DPZ 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).
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 56 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Clint Carlson of Carlson Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we're going to review the latest hedge fund action surrounding Domino's Pizza, Inc. (NYSE:DPZ).
What does smart money think about Domino's Pizza, Inc. (NYSE:DPZ)?
At Q2's end, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the first quarter of 2020. On the other hand, there were a total of 27 hedge funds with a bullish position in DPZ a year ago. With hedgies' sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the most valuable position in Domino's Pizza, Inc. (NYSE:DPZ), worth close to $568.8 million, accounting for 0.5% of its total 13F portfolio. The second largest stake is held by Gabriel Plotkin of Melvin Capital Management, with a $345.4 million position; the fund has 2% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism contain Ken Fisher's Fisher Asset Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Crestwood Capital Management allocated the biggest weight to Domino's Pizza, Inc. (NYSE:DPZ), around 4.88% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, dishing out 2.31 percent of its 13F equity portfolio to DPZ.
As industrywide interest jumped, specific money managers were breaking ground themselves. Interval Partners, managed by Gregg Moskowitz, assembled the biggest position in Domino's Pizza, Inc. (NYSE:DPZ). Interval Partners had $19.6 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson's Adage Capital Management also initiated a $16.2 million position during the quarter. The other funds with brand new DPZ positions are Clint Carlson's Carlson Capital, Amir Mokari's Emerson Point Capital, and Doron Breen and Mori Arkin's Sphera Global Healthcare Fund.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Domino's Pizza, Inc. (NYSE:DPZ) but similarly valued. These stocks are ViacomCBS Inc. (NASDAQ:VIAC), GSX Techedu Inc. (NYSE:GSX), Zscaler, Inc. (NASDAQ:ZS), Kansas City Southern (NYSE:KSU), Jack Henry & Associates, Inc. (NASDAQ:JKHY), Roku, Inc. (NASDAQ:ROKU), and Boston Properties, Inc. (NYSE:BXP). This group of stocks' market caps are closest to DPZ's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VIAC,45,1153093,-9 GSX,13,103316,0 ZS,35,641838,8 KSU,47,502734,2 JKHY,31,276056,4 ROKU,41,450808,6 BXP,36,539228,7 Average,35.4,523868,2.6 [/table]
As you can see these stocks had an average of 35.4 hedge funds with bullish positions and the average amount invested in these stocks was $524 million. That figure was $1747 million in DPZ's case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 13 bullish hedge fund positions. Domino's Pizza, Inc. (NYSE:DPZ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DPZ is 87. 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. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately DPZ wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DPZ were disappointed as the stock returned 10.7% 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.
