Hedge Funds Are Dumping DraftKings Inc. (DKNG)

·6 min read

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Melvin Capital's recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards DraftKings Inc. (NASDAQ:DKNG).

DraftKings Inc. (NASDAQ:DKNG) shareholders have witnessed a decrease in hedge fund sentiment of late. DraftKings Inc. (NASDAQ:DKNG) was in 26 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 53. Our calculations also showed that DKNG isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Cathie Wood ARK Investment Management
Cathie Wood ARK Investment Management

Cathie Wood of ARK Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we're going to check out the new hedge fund action encompassing DraftKings Inc. (NASDAQ:DKNG).

Do Hedge Funds Think DKNG Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -40% from the first quarter of 2020. By comparison, 53 hedge funds held shares or bullish call options in DKNG a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in DraftKings Inc. (NASDAQ:DKNG) was held by ARK Investment Management, which reported holding $711 million worth of stock at the end of June. It was followed by Citadel Investment Group with a $202.6 million position. Other investors bullish on the company included D E Shaw, Citadel Investment Group, and Granger Management. In terms of the portfolio weights assigned to each position Granger Management allocated the biggest weight to DraftKings Inc. (NASDAQ:DKNG), around 9.33% of its 13F portfolio. Diker Management is also relatively very bullish on the stock, setting aside 4.01 percent of its 13F equity portfolio to DKNG.

Judging by the fact that DraftKings Inc. (NASDAQ:DKNG) has witnessed declining sentiment from the smart money, it's easy to see that there were a few funds who sold off their full holdings by the end of the second quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dropped the largest stake of the 750 funds tracked by Insider Monkey, comprising about $211.3 million in stock, and Eashwar Krishnan's Tybourne Capital Management was right behind this move, as the fund sold off about $138.1 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 17 funds by the end of the second quarter.

Let's also examine hedge fund activity in other stocks similar to DraftKings Inc. (NASDAQ:DKNG). We will take a look at MGM Resorts International (NYSE:MGM), Church & Dwight Co., Inc. (NYSE:CHD), Gartner Inc (NYSE:IT), Fortis Inc. (NYSE:FTS), StoneCo Ltd. (NASDAQ:STNE), Avantor, Inc. (NYSE:AVTR), and Halliburton Company (NYSE:HAL). This group of stocks' market caps are similar to DKNG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGM,59,2889161,2 CHD,35,1383073,8 IT,39,1988886,-1 FTS,9,185027,-1 STNE,44,2739991,5 AVTR,44,2178398,-4 HAL,29,1336150,1 Average,37,1814384,1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37 hedge funds with bullish positions and the average amount invested in these stocks was $1814 million. That figure was $928 million in DKNG's case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 9 bullish hedge fund positions. DraftKings Inc. (NASDAQ:DKNG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DKNG is 19.7. 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 negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and surpassed the market again by 4.5 percentage points. Unfortunately DKNG wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); DKNG investors were disappointed as the stock returned -7.8% since the end of June (through 10/15) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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

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