Is Darden Restaurants, Inc. (DRI) Going to Burn These Hedge Funds?

Nina Todic

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 Peltz's recent General Electric 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 Darden Restaurants, Inc. (NYSE:DRI).

Darden Restaurants, Inc. (NYSE:DRI) has experienced a decrease in support from the world's most elite money managers recently. Our calculations also showed that DRI isn't among the 30 most popular stocks among hedge funds.

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 flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Overdeck of Two Sigma

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to review the key hedge fund action encompassing Darden Restaurants, Inc. (NYSE:DRI).

What have hedge funds been doing with Darden Restaurants, Inc. (NYSE:DRI)?

Heading into the third quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -37% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in DRI over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with DRI Positions

Among these funds, AQR Capital Management held the most valuable stake in Darden Restaurants, Inc. (NYSE:DRI), which was worth $288.8 million at the end of the second quarter. On the second spot was Arrowstreet Capital which amassed $216.4 million worth of shares. Moreover, Two Sigma Advisors, GLG Partners, and Renaissance Technologies were also bullish on Darden Restaurants, Inc. (NYSE:DRI), allocating a large percentage of their portfolios to this stock.

Judging by the fact that Darden Restaurants, Inc. (NYSE:DRI) has experienced a decline in interest from the smart money, it's easy to see that there is a sect of money managers who were dropping their positions entirely heading into Q3. Interestingly, Gabriel Plotkin's Melvin Capital Management dropped the largest position of the 750 funds followed by Insider Monkey, worth about $85 million in stock. Steve Cohen's fund, Point72 Asset Management, also dropped its stock, about $49.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 14 funds heading into Q3.

Let's now review hedge fund activity in other stocks similar to Darden Restaurants, Inc. (NYSE:DRI). We will take a look at Dover Corporation (NYSE:DOV), Evergy, Inc. (NYSE:EVRG), Tableau Software Inc (NYSE:DATA), and W.W. Grainger, Inc. (NYSE:GWW). This group of stocks' market values are similar to DRI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOV,32,604250,2 EVRG,25,962365,1 DATA,55,3598512,11 GWW,21,285138,-8 Average,33.25,1362566,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.25 hedge funds with bullish positions and the average amount invested in these stocks was $1363 million. That figure was $799 million in DRI's case. Tableau Software Inc (NYSE:DATA) is the most popular stock in this table. On the other hand W.W. Grainger, Inc. (NYSE:GWW) is the least popular one with only 21 bullish hedge fund positions. Darden Restaurants, Inc. (NYSE:DRI) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately DRI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DRI investors were disappointed as the stock returned -2.2% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks (see the video below) among hedge funds as many of these stocks already outperformed the market so far in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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