Hedge Funds Are Betting Big on These Restaurant Stocks

With the price of oil near decade lows, consumers have more spending power than ever before. Given the accommodating climate, it’s not surprising that many smart money funds are long McDonald’s Corporation (NYSE:MCD), Yum! Brands, Inc. (NYSE:YUM), Starbucks Corporation (NASDAQ:SBUX), Darden Restaurants, Inc. (NYSE:DRI), and Bloomin’ Brands Inc (NASDAQ:BLMN), restaurant chains that will benefit the increased consumer spending. Let’s take a closer look at each of the five stocks.

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 52 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. 48.6% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

#5 Bloomin’ Brands Inc (NASDAQ:BLMN)

– Number of Hedge Fund Holders (as of September 30): 30
– Total Value of Hedge Fund Holdings (as of September 30): $408.07 million
– Hedge Fund Holdings as Percent of Float (as of September 30): 18.30%

Bloomin’ Brands Inc (NASDAQ:BLMN) turned in a mixed third quarter, with EPS of $0.15 on revenue of $1.03 billion. Although profits exceeded analyst expectations by $0.01 per share, sales missed estimates by $10 million. U.S. comparable restaurant sales retreated by 1.3% year-over-year and the company’s restaurant-level operating margin was flat. Although Bloomin’ Brands’ fundamentals aren’t exactly blowing away expectations, hedge funds like the stock because Bloomin’ Brends trades at just 11.42 times forward earnings. Among the 30 funds long the stock at the end of the third quarter is Thomas E. Claugus‘ GMT Capital.

#4 Darden Restaurants, Inc. (NYSE:DRI)

– Number of Hedge Fund Holders (as of September 30): 33
– Total Value of Hedge Fund Holdings (as of September 30): $1.35 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 15.50%

Seeing as how the U.S. economy is strong and wage growth is rising again, 33 elite funds were long Darden Restaurants, Inc. (NYSE:DRI) at the end of the third quarter. Among the bulls is Jeffrey Smith‘s Starboard Value LP, which kept its stake of 11.64 million shares constant quarter-over-quarter, and Joel Greenblatt‘s Gotham Asset Management, which bumped up its stake by 20% to 696,639 shares. Hedge funds are buying because Darden pays an attractive 3.75% dividend yield and trades for a forward P/E of 16.11. After spinning-off its select real estate and restaurant assets into a separate REIT named Four Corners Property Trust, Inc. (NYSE: FCPT) in November, the company also plans to reduce its debt by $1 billion. If the economy improves, look for Darden EPS to rise.

#3 Starbucks Corporation (NASDAQ:SBUX)

– Number of Hedge Fund Holders (as of September 30): 54
– Total Value of Hedge Fund Holdings (as of September 30): $1.72 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 2.00%

Starbucks Corporation (NASDAQ:SBUX) is one of the best performing stocks of 2015 with a year-to-date rally of 47%. The coffee chain has either met or exceeded analyst top and bottom line expectations every quarter this year. With many Americans as addicted to coffee as they were to tobacco, the chain’s fundamentals won’t deteriorate any time soon. Given the relative strength, it’s not surprising that many hedge funds own the stock. According to our extensive database, the number of elite funds long Starbucks increased to 54 at the end of September from 46 at the end of June.

#2 Yum! Brands, Inc. (NYSE:YUM)

– Number of Hedge Fund Holders (as of September 30): 65
– Total Value of Hedge Fund Holdings (as of September 30): $5.05 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 14.60%

Yum! Brands, Inc. (NYSE:YUM) will be two different companies by the end of 2016, Yum China and Yum Brands. Bulls hope the spin-off will increase focus and improve Yum’s stock performance, which has been lacking lately. Given the stabilizing and rising Shanghai stock market, a China listing could also help. If the Chinese owned more of the company, Yum might have better same store sales and less critical media attention. Dan Loeb’s Third Point owned 11.6 million shares at the end of September.

#1 McDonald’s Corporation (NYSE:MCD)

– Number of Hedge Fund Holders (as of September 30): 75
– Total Value of Hedge Fund Holdings (as of September 30): $6.11 billion
– Hedge Fund Holdings as Percent of Float (as of September 30): 6.60%

After being written off as a has-been, McDonald’s Corporation (NYSE:MCD) is back and shareholders are lovin’ it. Shares of the golden arches chain are up 28% year-to-date as CEO Steve Easterbrook’s asset light plan to increase return on capital and same store sales begins to work. The company’s re-franchising has helped McDonald’s increase its global comparable-store sales 4% year-over-year in the third quarter and has made investors more confident in the company’s future. Given McDonald’s current trajectory, its dividend yield of 3.06% is safe.

Disclosure: none