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Is Noodles & Co (NDLS) A Good Stock To Buy?

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Nina Todic
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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Noodles & Co (NASDAQ:NDLS).

Is Noodles & Co (NASDAQ:NDLS) the right pick for your portfolio? The smart money is becoming less confident. The number of bullish hedge fund bets decreased by 3 recently. Our calculations also showed that ndls isn't among the 30 most popular stocks among hedge funds. NDLS was in 17 hedge funds' portfolios at the end of the first quarter of 2019. There were 20 hedge funds in our database with NDLS positions at the end of the previous quarter.

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 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Driehaus
Richard Driehaus

Let's take a look at the recent hedge fund action surrounding Noodles & Co (NASDAQ:NDLS).

Hedge fund activity in Noodles & Co (NASDAQ:NDLS)

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the previous quarter. By comparison, 5 hedge funds held shares or bullish call options in NDLS a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

No of Hedge Funds with NDLS Positions
No of Hedge Funds with NDLS Positions

Among these funds, Mill Road Capital Management held the most valuable stake in Noodles & Co (NASDAQ:NDLS), which was worth $32.7 million at the end of the first quarter. On the second spot was Woodson Capital Management which amassed $18.1 million worth of shares. Moreover, Tenzing Global Investors, Driehaus Capital, and Prospector Partners were also bullish on Noodles & Co (NASDAQ:NDLS), allocating a large percentage of their portfolios to this stock.

Judging by the fact that Noodles & Co (NASDAQ:NDLS) has experienced declining sentiment from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedgies who sold off their positions entirely by the end of the third quarter. At the top of the heap, Ken Grossman and Glen Schneider's SG Capital Management sold off the largest position of the 700 funds followed by Insider Monkey, valued at about $7.2 million in stock, and Anand Parekh's Alyeska Investment Group was right behind this move, as the fund sold off about $6 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 3 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Noodles & Co (NASDAQ:NDLS) but similarly valued. These stocks are Investors Title Company (NASDAQ:ITIC), Diana Shipping Inc. (NYSE:DSX), Hamilton Beach Brands Holding Company (NYSE:HBB), and StarTek, Inc. (NYSE:SRT). This group of stocks' market caps resemble NDLS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ITIC,4,38210,-1 DSX,8,26427,-1 HBB,3,5210,1 SRT,7,12929,1 Average,5.5,20694,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.5 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $84 million in NDLS's case. Diana Shipping Inc. (NYSE:DSX) is the most popular stock in this table. On the other hand Hamilton Beach Brands Holding Company (NYSE:HBB) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Noodles & Co (NASDAQ:NDLS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on NDLS as the stock returned 6.3% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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