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. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going (read our latest 10 coronavirus predictions).
Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Darden Restaurants, Inc. (NYSE:DRI).
Is Darden Restaurants, Inc. (NYSE:DRI) ready to rally soon? Prominent investors are getting more bullish. The number of long hedge fund positions inched up by 2 lately. Our calculations also showed that DRI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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 let’s view the fresh hedge fund action encompassing Darden Restaurants, Inc. (NYSE:DRI).
How are hedge funds trading Darden Restaurants, Inc. (NYSE:DRI)?
At the end of the fourth quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from one quarter earlier. By comparison, 37 hedge funds held shares or bullish call options in DRI a year ago. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
Among these funds, AQR Capital Management held the most valuable stake in Darden Restaurants, Inc. (NYSE:DRI), which was worth $249.1 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $108.2 million worth of shares. Holocene Advisors, D E Shaw, and Point72 Asset 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 Sustainable Insight Capital Management allocated the biggest weight to Darden Restaurants, Inc. (NYSE:DRI), around 3.63% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, designating 1.35 percent of its 13F equity portfolio to DRI.
As aggregate interest increased, specific money managers have jumped into Darden Restaurants, Inc. (NYSE:DRI) headfirst. Holocene Advisors, managed by Brandon Haley, initiated the most outsized position in Darden Restaurants, Inc. (NYSE:DRI). Holocene Advisors had $74.9 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $52.9 million position during the quarter. The following funds were also among the new DRI investors: Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, Brad Stephens’s Six Columns Capital, and Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management.
Let’s check out hedge fund activity in other stocks similar to Darden Restaurants, Inc. (NYSE:DRI). We will take a look at Tenaris S.A. (NYSE:TS), Atmos Energy Corporation (NYSE:ATO), Arconic Inc. (NYSE:ARNC), and Host Hotels and Resorts Inc (NYSE:HST). This group of stocks’ market values match DRI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TS | 16 | 368767 | 5 |
| ATO | 26 | 315309 | 3 |
| ARNC | 43 | 3678178 | 8 |
| HST | 27 | 409585 | -3 |
| Average | 28 | 1192960 | 3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $1193 million. That figure was $730 million in DRI’s case. Arconic Inc. (NYSE:ARNC) is the most popular stock in this table. On the other hand Tenaris S.A. (NYSE:TS) is the least popular one with only 16 bullish hedge fund positions. Darden Restaurants, Inc. (NYSE:DRI) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately DRI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DRI were disappointed as the stock returned -54.5% 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.
