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Were Hedge Funds Right About Franchise Group, Inc. (FRG)?

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·6 min read
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Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 900 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Franchise Group, Inc. (NASDAQ:FRG) in this article.

Is Franchise Group, Inc. (NASDAQ:FRG) a cheap stock to buy now? Hedge funds were taking a bullish view. The number of bullish hedge fund bets increased by 3 lately. Franchise Group, Inc. (NASDAQ:FRG) was in 17 hedge funds' portfolios at the end of March. The all time high for this statistic was previously 16. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that FRG isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 14 hedge funds in our database with FRG positions at the end of the fourth quarter.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Carlo Cannell
Carlo Cannell

J. Carlo Cannell of Cannell Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Now let's analyze the recent hedge fund action surrounding Franchise Group, Inc. (NASDAQ:FRG).

Do Hedge Funds Think FRG Is A Good Stock To Buy Now?

Heading into the second quarter of 2021, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 7 hedge funds with a bullish position in FRG a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Franchise Group, Inc. (NASDAQ:FRG) was held by Cannell Capital, which reported holding $30.6 million worth of stock at the end of December. It was followed by Ophir Asset Management with a $28.2 million position. Other investors bullish on the company included Brant Point Investment Management, Arrowstreet Capital, and Ancora Advisors. In terms of the portfolio weights assigned to each position Cannell Capital allocated the biggest weight to Franchise Group, Inc. (NASDAQ:FRG), around 6.86% of its 13F portfolio. Ophir Asset Management is also relatively very bullish on the stock, dishing out 5.71 percent of its 13F equity portfolio to FRG.

As industrywide interest jumped, some big names have jumped into Franchise Group, Inc. (NASDAQ:FRG) headfirst. Brant Point Investment Management, managed by Ira Unschuld, assembled the most outsized position in Franchise Group, Inc. (NASDAQ:FRG). Brant Point Investment Management had $5.8 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $1.8 million position during the quarter. The following funds were also among the new FRG investors: Ken Griffin's Citadel Investment Group, Michael Gelband's ExodusPoint Capital, and Ken Griffin's Citadel Investment Group.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Franchise Group, Inc. (NASDAQ:FRG) but similarly valued. These stocks are Textainer Group Holdings Limited (NYSE:TGH), Universal Corp (NYSE:UVV), Johnson Outdoors Inc. (NASDAQ:JOUT), ProAssurance Corporation (NYSE:PRA), Porch Group, Inc. (NASDAQ:PRCH), Lantheus Holdings Inc (NASDAQ:LNTH), and PAR Technology Corporation (NYSE:PAR). This group of stocks' market valuations resemble FRG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TGH,14,46267,3 UVV,10,92871,1 JOUT,11,130085,-1 PRA,13,168917,-3 PRCH,27,413543,-2 LNTH,15,207330,2 PAR,16,426618,-3 Average,15.1,212233,-0.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.1 hedge funds with bullish positions and the average amount invested in these stocks was $212 million. That figure was $96 million in FRG's case. Porch Group, Inc. (NASDAQ:PRCH) is the most popular stock in this table. On the other hand Universal Corp (NYSE:UVV) is the least popular one with only 10 bullish hedge fund positions. Franchise Group, Inc. (NASDAQ:FRG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FRG is 58.6. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and beat the market again by 10.1 percentage points. Unfortunately FRG wasn't nearly as popular as these 5 stocks and hedge funds that were betting on FRG were disappointed as the stock returned -3.1% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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