We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Darden Restaurants, Inc. (NYSE:DRI) and determine whether hedge funds skillfully traded this stock.
Is Darden Restaurants, Inc. (NYSE:DRI) a great investment right now? Hedge funds were taking a pessimistic view. The number of bullish hedge fund bets shrunk by 3 lately. Darden Restaurants, Inc. (NYSE:DRI) was in 49 hedge funds' portfolios at the end of June. The all time high for this statistics is 52. Our calculations also showed that DRI 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). There were 52 hedge funds in our database with DRI holdings at the end of March. Video: Watch our video about the top 5 most popular hedge fund stocks.
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' 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 58 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.
Scott Ferguson of Sachem Head Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 junior gold mining stock.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let's analyze the new hedge fund action encompassing Darden Restaurants, Inc. (NYSE:DRI).
How are hedge funds trading Darden Restaurants, Inc. (NYSE:DRI)?
Heading into the third quarter of 2020, a total of 49 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the first quarter of 2020. On the other hand, there were a total of 24 hedge funds with a bullish position in DRI a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
The largest stake in Darden Restaurants, Inc. (NYSE:DRI) was held by Viking Global, which reported holding $226.7 million worth of stock at the end of September. It was followed by Melvin Capital Management with a $75.8 million position. Other investors bullish on the company included AQR Capital Management, Point72 Asset Management, and Soros Fund Management. In terms of the portfolio weights assigned to each position Greenvale Capital allocated the biggest weight to Darden Restaurants, Inc. (NYSE:DRI), around 8.17% of its 13F portfolio. Sachem Head Capital is also relatively very bullish on the stock, earmarking 3.56 percent of its 13F equity portfolio to DRI.
Due to the fact that Darden Restaurants, Inc. (NYSE:DRI) has experienced bearish sentiment from hedge fund managers, we can see that there was a specific group of money managers that slashed their positions entirely heading into Q3. Intriguingly, Dmitry Balyasny's Balyasny Asset Management cut the largest investment of the "upper crust" of funds monitored by Insider Monkey, totaling close to $38.2 million in stock, and Anand Parekh's Alyeska Investment Group was right behind this move, as the fund cut about $21.5 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 3 funds heading into Q3.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Darden Restaurants, Inc. (NYSE:DRI) but similarly valued. We will take a look at HubSpot Inc (NYSE:HUBS), Avantor, Inc. (NYSE:AVTR), Qiagen NV (NYSE:QGEN), China Southern Airlines Co Ltd (NYSE:ZNH), RPM International Inc. (NYSE:RPM), The Carlyle Group Inc. (NASDAQ:CG), and Magellan Midstream Partners, L.P. (NYSE:MMP). All of these stocks' market caps are similar to DRI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HUBS,41,867564,14 AVTR,34,646574,5 QGEN,32,652397,2 ZNH,2,7852,0 RPM,26,108615,4 CG,8,171536,-8 MMP,15,59070,2 Average,22.6,359087,2.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.6 hedge funds with bullish positions and the average amount invested in these stocks was $359 million. That figure was $1203 million in DRI's case. HubSpot Inc (NYSE:HUBS) is the most popular stock in this table. On the other hand China Southern Airlines Co Ltd (NYSE:ZNH) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Darden Restaurants, Inc. (NYSE:DRI) is more popular among hedge funds. Our overall hedge fund sentiment score for DRI is 74.3. 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. 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 33% in 2020 through the end of August and still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on DRI, though not to the same extent, as the stock returned 14.4% since the end of June and outperformed the market as well.
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Disclosure: None. This article was originally published at Insider Monkey.