Were Hedge Funds Right About Dumping Fiesta Restaurant Group Inc (FRGI)?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds’ top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. That’s a big deal.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Fiesta Restaurant Group Inc (NASDAQ:FRGI) was in 14 hedge funds’ portfolios at the end of June. FRGI has seen a decrease in hedge fund sentiment lately. There were 18 hedge funds in our database with FRGI positions at the end of the previous quarter. Our calculations also showed that FRGI isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

D. E. Shaw

Unlike other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. Let’s check out the key hedge fund action surrounding Fiesta Restaurant Group Inc (NASDAQ:FRGI).

How are hedge funds trading Fiesta Restaurant Group Inc (NASDAQ:FRGI)?

At the end of the second quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in FRGI a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with FRGI Positions

Among these funds, Leucadia National held the most valuable stake in Fiesta Restaurant Group Inc (NASDAQ:FRGI), which was worth $69.1 million at the end of the second quarter. On the second spot was Private Capital Management which amassed $19.9 million worth of shares. Moreover, D E Shaw, Millennium Management, and Birch Run Capital were also bullish on Fiesta Restaurant Group Inc (NASDAQ:FRGI), allocating a large percentage of their portfolios to this stock.

Seeing as Fiesta Restaurant Group Inc (NASDAQ:FRGI) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there exists a select few hedgies that slashed their full holdings heading into Q3. Interestingly, John W. Moon’s Moon Capital dropped the largest stake of all the hedgies tracked by Insider Monkey, valued at an estimated $1.3 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund dropped about $1.1 million worth. These transactions are interesting, as total hedge fund interest was cut by 4 funds heading into Q3.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Fiesta Restaurant Group Inc (NASDAQ:FRGI) but similarly valued. These stocks are Timkensteel Corporation (NYSE:TMST), Syros Pharmaceuticals, Inc. (NASDAQ:SYRS), HighPoint Resources Corporation (NYSE:HPR), and HCI Group, Inc. (NYSE:HCI). This group of stocks’ market values resemble FRGI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TMST 16 54809 3
SYRS 13 83094 5
HPR 8 48067 -6
HCI 11 20029 2
Average 12 51500 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $51 million. That figure was $118 million in FRGI’s case. Timkensteel Corporation (NYSE:TMST) is the most popular stock in this table. On the other hand HighPoint Resources Corporation (NYSE:HPR) is the least popular one with only 8 bullish hedge fund positions. Fiesta Restaurant Group Inc (NASDAQ:FRGI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately FRGI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FRGI were disappointed as the stock returned -20.7% during the third quarter 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 many of these stocks already outperformed the market so far this year.

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