Is FRG A Good Stock To Buy Now?

In this article we will check out the progression of hedge fund sentiment towards Franchise Group, Inc. (NASDAQ:FRG) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is FRG a good stock to buy now? Money managers were getting less optimistic. The number of bullish hedge fund positions decreased by 4 in recent months. Franchise Group, Inc. (NASDAQ:FRG) was in 12 hedge funds’ portfolios at the end of September. The all time high for this statistics is 16. Our calculations also showed that FRG isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 16 hedge funds in our database with FRG holdings at the end of June.

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

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 66 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Gavin Saitowitz of Prelude Capital

Gavin Saitowitz of Prelude Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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. You can subscribe to our free daily newsletter on our website. With all of this in mind let’s take a gander at the new hedge fund action surrounding Franchise Group, Inc. (NASDAQ:FRG).

Do Hedge Funds Think FRG Is A Good Stock To Buy Now?

Heading into the fourth quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in FRG over the last 21 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Cannell Capital was the largest shareholder of Franchise Group, Inc. (NASDAQ:FRG), with a stake worth $22.7 million reported as of the end of September. Trailing Cannell Capital was Nantahala Capital Management, which amassed a stake valued at $15.2 million. Portolan Capital Management, Arrowstreet Capital, and Springbok Capital 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 Cannell Capital allocated the biggest weight to Franchise Group, Inc. (NASDAQ:FRG), around 8.31% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, earmarking 1.37 percent of its 13F equity portfolio to FRG.

Due to the fact that Franchise Group, Inc. (NASDAQ:FRG) has experienced falling interest from the smart money, we can see that there were a few money managers that decided to sell off their positions entirely by the end of the third quarter. At the top of the heap, Lee Hicks and Jan Koerner’s Park Presidio Capital dumped the largest position of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $2 million in stock. Philip Hempleman’s fund, Ardsley Partners, also cut its stock, about $1.9 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 4 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Franchise Group, Inc. (NASDAQ:FRG) but similarly valued. We will take a look at The Macerich Company (NYSE:MAC), DRDGOLD Ltd. (NYSE:DRD), Castle Biosciences, Inc. (NASDAQ:CSTL), Suburban Propane Partners LP (NYSE:SPH), DiamondRock Hospitality Company (NYSE:DRH), Translate Bio, Inc. (NASDAQ:TBIO), and GenMark Diagnostics, Inc (NASDAQ:GNMK). This group of stocks’ market values are similar to FRG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MAC 18 42563 -2
DRD 9 32197 7
CSTL 18 89583 0
SPH 3 11375 1
DRH 14 63389 -2
TBIO 23 342432 -3
GNMK 25 297839 1
Average 15.7 125625 0.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.7 hedge funds with bullish positions and the average amount invested in these stocks was $126 million. That figure was $62 million in FRG’s case. GenMark Diagnostics, Inc (NASDAQ:GNMK) is the most popular stock in this table. On the other hand Suburban Propane Partners LP (NYSE:SPH) is the least popular one with only 3 bullish hedge fund positions. Franchise Group, Inc. (NASDAQ:FRG) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FRG is 44. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and surpassed the market again by 16.2 percentage points. Unfortunately FRG wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FRG investors were disappointed as the stock returned 10.4% since the end of September (through 12/8) and underperformed 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 most of these stocks already outperformed the market in 2020.

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