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Should You Avoid DiamondRock Hospitality Company (DRH)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether DiamondRock Hospitality Company (NYSE:DRH) 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.

DiamondRock Hospitality Company (NYSE:DRH) was in 17 hedge funds’ portfolios at the end of December. DRH investors should be aware of a decrease in support from the world’s most elite money managers of late. There were 18 hedge funds in our database with DRH positions at the end of the previous quarter. Our calculations also showed that DRH isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

COATUE MANAGEMENT

Philippe Laffont of Coatue Management

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. 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. Now let’s analyze the recent hedge fund action encompassing DiamondRock Hospitality Company (NYSE:DRH).

Hedge fund activity in DiamondRock Hospitality Company (NYSE:DRH)

Heading into the first quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DRH over the last 18 quarters. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, Pzena Investment Management held the most valuable stake in DiamondRock Hospitality Company (NYSE:DRH), which was worth $16.7 million at the end of the third quarter. On the second spot was Echo Street Capital Management which amassed $15.4 million worth of shares. Intrinsic Edge Capital, Two Sigma Advisors, and Millennium Management 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 Intrinsic Edge Capital allocated the biggest weight to DiamondRock Hospitality Company (NYSE:DRH), around 0.97% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, earmarking 0.24 percent of its 13F equity portfolio to DRH.

Judging by the fact that DiamondRock Hospitality Company (NYSE:DRH) has faced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there exists a select few fund managers that slashed their entire stakes heading into Q4. It’s worth mentioning that Parag Vora’s HG Vora Capital Management sold off the biggest position of the 750 funds tracked by Insider Monkey, totaling about $53.8 million in stock, and Isaac Corre’s Governors Lane was right behind this move, as the fund sold off about $4.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to DiamondRock Hospitality Company (NYSE:DRH). We will take a look at Genworth Financial Inc (NYSE:GNW), Crestwood Equity Partners LP (NYSE:CEQP), Ra Pharmaceuticals, Inc. (NASDAQ:RARX), and Welbilt, Inc. (NYSE:WBT). This group of stocks’ market caps resemble DRH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GNW 32 278398 3
CEQP 6 16286 -1
RARX 28 863481 7
WBT 28 582074 1
Average 23.5 435060 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $435 million. That figure was $73 million in DRH’s case. Genworth Financial Inc (NYSE:GNW) is the most popular stock in this table. On the other hand Crestwood Equity Partners LP (NYSE:CEQP) is the least popular one with only 6 bullish hedge fund positions. DiamondRock Hospitality Company (NYSE:DRH) is not the least popular stock in this group but hedge fund interest is still below average. 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 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately DRH wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); DRH investors were disappointed as the stock returned -57.2% during the same time period 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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