Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Darden Restaurants, Inc. (NYSE:DRI).
Is Darden Restaurants, Inc. (NYSE:DRI) a healthy stock for your portfolio? The smart money is in a bullish mood. The number of bullish hedge fund bets moved up by 4 lately. Our calculations also showed that DRI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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 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.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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 even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s analyze the recent hedge fund action surrounding Darden Restaurants, Inc. (NYSE:DRI).
How are hedge funds trading Darden Restaurants, Inc. (NYSE:DRI)?
At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from one quarter earlier. By comparison, 22 hedge funds held shares or bullish call options in DRI a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the biggest position in Darden Restaurants, Inc. (NYSE:DRI). AQR Capital Management has a $257.4 million position in the stock, comprising 0.3% of its 13F portfolio. Sitting at the No. 2 spot is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $196.6 million position; 0.5% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that hold long positions consist of Renaissance Technologies, John Overdeck and David Siegel’s Two Sigma Advisors and James Parsons’s Junto Capital Management. In terms of the portfolio weights assigned to each position Junto Capital Management allocated the biggest weight to Darden Restaurants, Inc. (NYSE:DRI), around 2.52% of its 13F portfolio. Centenus Global Management is also relatively very bullish on the stock, earmarking 1.08 percent of its 13F equity portfolio to DRI.
Now, key hedge funds were breaking ground themselves. Junto Capital Management, managed by James Parsons, established the most valuable position in Darden Restaurants, Inc. (NYSE:DRI). Junto Capital Management had $42.5 million invested in the company at the end of the quarter. Sara Nainzadeh’s Centenus Global Management also initiated a $7.7 million position during the quarter. The following funds were also among the new DRI investors: Ray Dalio’s Bridgewater Associates, David Costen Haley’s HBK Investments, and Mike Vranos’s Ellington.
Let’s also examine hedge fund activity in other stocks similar to Darden Restaurants, Inc. (NYSE:DRI). These stocks are Dover Corporation (NYSE:DOV), Align Technology, Inc. (NASDAQ:ALGN), MGM Resorts International (NYSE:MGM), and ArcelorMittal (NYSE:MT). This group of stocks’ market valuations are closest to DRI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DOV | 30 | 731406 | -2 |
| ALGN | 34 | 1496709 | -7 |
| MGM | 48 | 2194471 | 13 |
| MT | 14 | 192839 | -1 |
| Average | 31.5 | 1153856 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $1154 million. That figure was $812 million in DRI’s case. MGM Resorts International (NYSE:MGM) is the most popular stock in this table. On the other hand ArcelorMittal (NYSE:MT) is the least popular one with only 14 bullish hedge fund positions. Darden Restaurants, Inc. (NYSE:DRI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately DRI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DRI investors were disappointed as the stock returned 12% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
