DiamondRock Hospitality Company (DRH): Are Hedge Funds Right About This Stock?

There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Carl Icahn and George Soros think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other successful funds’ exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze DiamondRock Hospitality Company (NYSE:DRH) .

Is DiamondRock Hospitality Company (NYSE:DRH) the right pick for your portfolio? Money managers are categorically actually turning less bullish. The number of bullish hedge fund bets retreated by 2 lately. DRH was in 12 hedge funds’ portfolios at the end of the third quarter of 2016. There were 14 hedge funds in our database with DRH holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as KapStone Paper and Packaging Corp. (NYSE:KS), Applied Industrial Technologies (NYSE:AIT), and IAMGOLD Corporation (USA) (NYSE:IAG) to gather more data points.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively most bullish on. Over the past year, this strategy generated returns of 18%, topping the 8% gain registered by S&P 500 ETFs. We launched this strategy 2.5 years ago and it returned more than 39% since then, vs. 22% gain registered by the S&P 500 ETFs.

Keeping this in mind, we’re going to review the new action encompassing DiamondRock Hospitality Company (NYSE:DRH).

What does the smart money think about DiamondRock Hospitality Company (NYSE:DRH)?

At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a drop of 14% from the second quarter of 2016. By comparison, 19 hedge funds held shares or bullish call options in DRH heading into this year. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Millennium Management, one of the 10 largest hedge funds in the world, holds the most valuable position in DiamondRock Hospitality Company (NYSE:DRH). According to regulatory filings, the fund has a $16.3 million position in the stock, comprising less than 0.1% of its 13F portfolio. Sitting at the No. 2 spot is Balyasny Asset Management, led by Dmitry Balyasny, holding a $9.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other peers with similar optimism encompass Richard S. Pzena’s Pzena Investment Management, Greg Poole’s Echo Street Capital Management and Chuck Royce’s Royce & Associates. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

Since DiamondRock Hospitality Company (NYSE:DRH) has sustained bearish sentiment from the smart money, we can see that there lies a certain “tier” of fund managers that elected to cut their positions entirely by the end of the third quarter. Interestingly, Eduardo Abush’s Waterfront Capital Partners said goodbye to the biggest stake of all the investors followed by Insider Monkey, comprising close to $9.7 million in stock. Ken Griffin’s fund, Citadel Investment Group, also said goodbye to its stock, about $8.8 million worth of DRH shares.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as DiamondRock Hospitality Company (NYSE:DRH) but similarly valued. We will take a look at KapStone Paper and Packaging Corp. (NYSE:KS), Applied Industrial Technologies (NYSE:AIT), IAMGOLD Corporation (USA) (NYSE:IAG), and West Corp (NASDAQ:WSTC). This group of stocks’ market values are similar to DRH’s market value.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $108 million. That figure was $50 million in DRH’s case. KapStone Paper and Packaging Corp. (NYSE:KS) is the most popular stock in this table. On the other hand Applied Industrial Technologies (NYSE:AIT) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks DiamondRock Hospitality Company (NYSE:DRH) is even less popular than AIT. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: none.