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Did Hedge Funds Make The Right Call On Texas Roadhouse Inc (TXRH) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Texas Roadhouse Inc (NASDAQ:TXRH) and determine whether hedge funds had an edge regarding this stock.

Is Texas Roadhouse Inc (NASDAQ:TXRH) worth your attention right now? Hedge funds were betting on the stock. The number of long hedge fund bets rose by 4 lately. Our calculations also showed that TXRH 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.

Ken Griffin CITADEL INVESTMENT GROUP

Ken Griffin of Citadel Investment Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the new hedge fund action encompassing Texas Roadhouse Inc (NASDAQ:TXRH).

How have hedgies been trading Texas Roadhouse Inc (NASDAQ:TXRH)?

Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the fourth quarter of 2019. On the other hand, there were a total of 25 hedge funds with a bullish position in TXRH a year ago. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Candlestick Capital Management, managed by Jack Woodruff, holds the most valuable position in Texas Roadhouse Inc (NASDAQ:TXRH). Candlestick Capital Management has a $23 million position in the stock, comprising 1% of its 13F portfolio. Coming in second is Citadel Investment Group, managed by Ken Griffin, which holds a $18.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions include John Overdeck and David Siegel’s Two Sigma Advisors, Steve Cohen’s Point72 Asset Management and Richard Merage’s MIG Capital. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to Texas Roadhouse Inc (NASDAQ:TXRH), around 1.54% of its 13F portfolio. Candlestick Capital Management is also relatively very bullish on the stock, designating 0.97 percent of its 13F equity portfolio to TXRH.

Consequently, some big names were breaking ground themselves. Candlestick Capital Management, managed by Jack Woodruff, established the most valuable position in Texas Roadhouse Inc (NASDAQ:TXRH). Candlestick Capital Management had $23 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also made a $14.6 million investment in the stock during the quarter. The following funds were also among the new TXRH investors: Richard Merage’s MIG Capital, Leon Shaulov’s Maplelane Capital, and Michael Gelband’s ExodusPoint Capital.

Let’s also examine hedge fund activity in other stocks similar to Texas Roadhouse Inc (NASDAQ:TXRH). These stocks are Verint Systems Inc. (NASDAQ:VRNT), Janus Henderson Group plc (NYSE:JHG), nVent Electric plc (NYSE:NVT), and Q2 Holdings Inc (NYSE:QTWO). All of these stocks’ market caps are closest to TXRH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VRNT 17 205592 2
JHG 23 124117 5
NVT 29 453695 1
QTWO 18 217845 -2
Average 21.75 250312 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $250 million. That figure was $147 million in TXRH’s case. nVent Electric plc (NYSE:NVT) is the most popular stock in this table. On the other hand Verint Systems Inc. (NASDAQ:VRNT) is the least popular one with only 17 bullish hedge fund positions. Texas Roadhouse Inc (NASDAQ:TXRH) 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 TXRH as the stock returned 27.3% 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.