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Did Hedge Funds Make The Right Call On Darling Ingredients Inc. (DAR) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Darling Ingredients Inc. (NYSE:DAR) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Darling Ingredients Inc. (NYSE:DAR) has seen an increase in hedge fund sentiment recently. Our calculations also showed that DAR isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind we’re going to analyze the fresh hedge fund action regarding Darling Ingredients Inc. (NYSE:DAR).

What have hedge funds been doing with Darling Ingredients Inc. (NYSE:DAR)?

At Q1’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 56% from the fourth quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in DAR a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

More specifically, Impax Asset Management was the largest shareholder of Darling Ingredients Inc. (NYSE:DAR), with a stake worth $97.1 million reported as of the end of September. Trailing Impax Asset Management was ValueAct Capital, which amassed a stake valued at $50.6 million. Fisher Asset Management, Lansdowne Partners, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Trellus Management Company allocated the biggest weight to Darling Ingredients Inc. (NYSE:DAR), around 3.61% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, earmarking 1.29 percent of its 13F equity portfolio to DAR.

As one would reasonably expect, specific money managers were leading the bulls’ herd. Lansdowne Partners, managed by Alex Snow, assembled the most outsized position in Darling Ingredients Inc. (NYSE:DAR). Lansdowne Partners had $15.6 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $9.3 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Michael Gelband’s ExodusPoint Capital, and Ken Griffin’s Citadel Investment Group.

Let’s also examine hedge fund activity in other stocks similar to Darling Ingredients Inc. (NYSE:DAR). These stocks are Glacier Bancorp, Inc. (NASDAQ:GBCI), ALLETE Inc (NYSE:ALE), Flowserve Corporation (NYSE:FLS), and MorphoSys AG (NASDAQ:MOR). All of these stocks’ market caps match DAR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GBCI 12 36299 -1
ALE 18 147349 -7
FLS 29 181471 3
MOR 5 14705 -1
Average 16 94956 -1.5

View table here if you experience formatting issues.

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 $95 million. That figure was $255 million in DAR’s case. Flowserve Corporation (NYSE:FLS) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 5 bullish hedge fund positions. Darling Ingredients Inc. (NYSE:DAR) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on DAR as the stock returned 28.4% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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