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Is DiamondRock Hospitality Company (DRH) A Good Stock To Buy ?

Nina Todic

"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards DiamondRock Hospitality Company (NYSE:DRH).

DiamondRock Hospitality Company (NYSE:DRH) was in 17 hedge funds' portfolios at the end of the second quarter of 2019. DRH investors should pay attention to an increase in support from the world's most elite money managers in recent months. There were 13 hedge funds in our database with DRH holdings at the end of the previous quarter. Our calculations also showed that DRH isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Parag Vora - HG Vora Capital

Unlike former hedge manager, Dr. Steve Sjuggerud, 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. Let's take a glance at the key hedge fund action regarding DiamondRock Hospitality Company (NYSE:DRH).

Hedge fund activity in DiamondRock Hospitality Company (NYSE:DRH)

At Q2's end, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 31% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in DRH a year ago. 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 DRH Positions

According to Insider Monkey's hedge fund database, HG Vora Capital Management, managed by Parag Vora, holds the largest position in DiamondRock Hospitality Company (NYSE:DRH). HG Vora Capital Management has a $69.8 million position in the stock, comprising 5.1% of its 13F portfolio. Sitting at the No. 2 spot is Long Pond Capital, led by John Khoury, holding a $33.2 million position; the fund has 1% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism consist of Greg Poole's Echo Street Capital Management, Richard S. Pzena's Pzena Investment Management and Isaac Corre's Governors Lane.

Now, some big names have jumped into DiamondRock Hospitality Company (NYSE:DRH) headfirst. Governors Lane, managed by Isaac Corre, initiated the most outsized position in DiamondRock Hospitality Company (NYSE:DRH). Governors Lane had $9.1 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $3.3 million position during the quarter. The other funds with new positions in the stock are Ken Griffin's Citadel Investment Group, D. E. Shaw's D E Shaw, and Benjamin A. Smith's Laurion Capital Management.

Let's check out hedge fund activity in other stocks similar to DiamondRock Hospitality Company (NYSE:DRH). These stocks are Amneal Pharmaceuticals, Inc. (NYSE:AMRX), Invesco Mortgage Capital Inc (NYSE:IVR), InterDigital, Inc. (NASDAQ:IDCC), and Centennial Resource Development, Inc. (NASDAQ:CDEV). This group of stocks' market valuations resemble DRH's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMRX,10,36610,2 IVR,11,69179,-4 IDCC,16,224039,0 CDEV,17,142786,2 Average,13.5,118154,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $177 million in DRH's case. Centennial Resource Development, Inc. (NASDAQ:CDEV) is the most popular stock in this table. On the other hand Amneal Pharmaceuticals, Inc. (NYSE:AMRX) is the least popular one with only 10 bullish hedge fund positions. DiamondRock Hospitality Company (NYSE:DRH) is not the most popular stock in this group but hedge fund interest is still above average. 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 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 DRH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on DRH were disappointed as the stock returned 0.3% 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 among hedge funds as many of these stocks already outperformed the market so far this year.

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

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