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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 Denny's Corporation (NASDAQ:DENN) and determine whether hedge funds had an edge regarding this stock.
Denny's Corporation (NASDAQ:DENN) was in 23 hedge funds' portfolios at the end of June. The all time high for this statistics is 22. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. DENN shareholders have witnessed an increase in hedge fund sentiment of late. There were 20 hedge funds in our database with DENN holdings at the end of March. Our calculations also showed that DENN 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.
Paul Marshall of Marshall Wace
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let's take a peek at the recent hedge fund action surrounding Denny's Corporation (NASDAQ:DENN).
How have hedgies been trading Denny's Corporation (NASDAQ:DENN)?
Heading into the third quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in DENN a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Cardinal Capital was the largest shareholder of Denny's Corporation (NASDAQ:DENN), with a stake worth $16 million reported as of the end of September. Trailing Cardinal Capital was Renaissance Technologies, which amassed a stake valued at $10.1 million. Arrowstreet Capital, Millennium 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 Cardinal Capital allocated the biggest weight to Denny's Corporation (NASDAQ:DENN), around 0.67% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, dishing out 0.62 percent of its 13F equity portfolio to DENN.
Now, some big names have jumped into Denny's Corporation (NASDAQ:DENN) headfirst. Millennium Management, managed by Israel Englander, initiated the most outsized position in Denny's Corporation (NASDAQ:DENN). Millennium Management had $6.5 million invested in the company at the end of the quarter. Warren Lammert's Granite Point Capital also made a $1 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace's Marshall Wace LLP, Lee Ainslie's Maverick Capital, and Michael Gelband's ExodusPoint Capital.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Denny's Corporation (NASDAQ:DENN) but similarly valued. These stocks are B. Riley Financial, Inc. (NASDAQ:RILY), Luther Burbank Corporation (NASDAQ:LBC), CEL-SCI Corporation (NYSE:CVM), Seanergy Maritime Holdings Corp. (NASDAQ:SHIP), Wabash National Corporation (NYSE:WNC), RPT Realty (NYSE:RPT), and iHeartMedia, Inc. (NASDAQ:IHRT). This group of stocks' market caps match DENN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RILY,16,92685,2 LBC,2,2745,-3 CVM,6,16920,1 SHIP,2,46,-1 WNC,15,43926,-1 RPT,14,32761,2 IHRT,24,112256,-4 Average,11.3,43048,-0.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.3 hedge funds with bullish positions and the average amount invested in these stocks was $43 million. That figure was $57 million in DENN's case. iHeartMedia, Inc. (NASDAQ:IHRT) is the most popular stock in this table. On the other hand Luther Burbank Corporation (NASDAQ:LBC) is the least popular one with only 2 bullish hedge fund positions. Denny's Corporation (NASDAQ:DENN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DENN is 85.7. 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 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately DENN wasn't nearly as popular as these 10 stocks and hedge funds that were betting on DENN were disappointed as the stock returned -1% in Q3 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.
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Disclosure: None. This article was originally published at Insider Monkey.