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Hedge Funds Have Never Been This Bullish On Darden Restaurants, Inc. (DRI)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of Darden Restaurants, Inc. (NYSE:DRI).

Darden Restaurants, Inc. (NYSE:DRI) shareholders have witnessed an increase in hedge fund interest lately. DRI was in 52 hedge funds’ portfolios at the end of the first quarter of 2020. There were 33 hedge funds in our database with DRI positions at the end of the previous quarter. Our calculations also showed that DRI 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.

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 S&P 500 ETFs by 44 percentage points since March 2017 (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.

Gabriel Plotkin Melvin Capital Management

Gabriel Plotkin of Melvin Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea.  For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this analyst’s “corona catalyst plays“. We interview hedge fund managers and ask them about best ideas. You can watch our latest hedge fund manager interview here and find out the name of the large-cap healthcare stock that Sio Capital’s Michael Castor expects to double. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a look at the key hedge fund action regarding Darden Restaurants, Inc. (NYSE:DRI).

Hedge fund activity in Darden Restaurants, Inc. (NYSE:DRI)

At Q1’s end, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of 58% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DRI over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Melvin Capital Management held the most valuable stake in Darden Restaurants, Inc. (NYSE:DRI), which was worth $175.6 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $153.9 million worth of shares. AQR Capital Management, Candlestick Capital Management, and Holocene Advisors 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 Greenvale Capital allocated the biggest weight to Darden Restaurants, Inc. (NYSE:DRI), around 6.08% of its 13F portfolio. Candlestick Capital Management is also relatively very bullish on the stock, dishing out 3.01 percent of its 13F equity portfolio to DRI.

Consequently, some big names were breaking ground themselves. Melvin Capital Management, managed by Gabriel Plotkin, initiated the most outsized position in Darden Restaurants, Inc. (NYSE:DRI). Melvin Capital Management had $175.6 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $38.2 million position during the quarter. The following funds were also among the new DRI investors: Bernard Horn’s Polaris Capital Management, Bruce Emery’s Greenvale Capital, and Anand Parekh’s Alyeska Investment Group.

Let’s now review hedge fund activity in other stocks similar to Darden Restaurants, Inc. (NYSE:DRI). These stocks are RenaissanceRe Holdings Ltd. (NYSE:RNR), Ionis Pharmaceuticals, Inc. (NASDAQ:IONS), Guardant Health, Inc. (NASDAQ:GH), and Guidewire Software Inc (NYSE:GWRE). All of these stocks’ market caps are similar to DRI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RNR 30 675791 7
IONS 22 342085 -5
GH 27 549369 -2
GWRE 34 756960 2
Average 28.25 581051 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $581 million. That figure was $879 million in DRI’s case. Guidewire Software Inc (NYSE:GWRE) is the most popular stock in this table. On the other hand Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Darden Restaurants, Inc. (NYSE:DRI) is more popular among hedge funds. 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 returned 7.9% in 2020 through May 22nd but still managed to beat the market by 15.6 percentage points. Hedge funds were also right about betting on DRI as the stock returned 38.9% so far in Q2 (through May 22nd) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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