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

Debasis Saha

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

DiamondRock Hospitality Company (NYSE:DRH) was in 16 hedge funds' portfolios at the end of September. DRH shareholders have witnessed a decrease in hedge fund interest lately. There were 17 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 (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_338420" align="alignnone" width="2480"] Parag Vora of HG Vora Capital Management[/caption]

Parag Vora - HG Vora Capital
Parag Vora - HG Vora Capital

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. Let's go over the key hedge fund action regarding DiamondRock Hospitality Company (NYSE:DRH).

What does smart money think about DiamondRock Hospitality Company (NYSE:DRH)?

Heading into the fourth quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 9 hedge funds with a bullish position in DRH a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is DRH A Good Stock To Buy?
Is DRH A Good Stock To Buy?

More specifically, HG Vora Capital Management was the largest shareholder of DiamondRock Hospitality Company (NYSE:DRH), with a stake worth $53.8 million reported as of the end of September. Trailing HG Vora Capital Management was Pzena Investment Management, which amassed a stake valued at $13.6 million. Renaissance Technologies, Echo Street Capital Management, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position HG Vora Capital Management allocated the biggest weight to DiamondRock Hospitality Company (NYSE:DRH), around 5.15% of its 13F portfolio. Governors Lane is also relatively very bullish on the stock, designating 0.58 percent of its 13F equity portfolio to DRH.

Judging by the fact that DiamondRock Hospitality Company (NYSE:DRH) has witnessed a decline in interest from the aggregate hedge fund industry, it's safe to say that there is a sect of money managers that decided to sell off their entire stakes last quarter. Intriguingly, John Khoury's Long Pond Capital dropped the largest stake of the "upper crust" of funds followed by Insider Monkey, comprising about $33.2 million in stock, and David E. Shaw's D E Shaw was right behind this move, as the fund sold off about $1.1 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 1 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as DiamondRock Hospitality Company (NYSE:DRH) but similarly valued. These stocks are Commercial Metals Company (NYSE:CMC), Diodes Incorporated (NASDAQ:DIOD), Renasant Corporation (NASDAQ:RNST), and LTC Properties Inc (NYSE:LTC). All of these stocks' market caps are similar to DRH's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CMC,17,233187,0 DIOD,21,71352,3 RNST,8,22648,-3 LTC,9,15502,-3 Average,13.75,85672,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $86 million. That figure was $116 million in DRH's case. Diodes Incorporated (NASDAQ:DIOD) is the most popular stock in this table. On the other hand Renasant Corporation (NASDAQ:RNST) is the least popular one with only 8 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 0.5% during the fourth quarter (through the end of November) 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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