Is Choice Hotels International, Inc. (CHH) a Good Stock To Buy?

The third quarter was a rough one for most investors, as fears of an interest rate hike in the U.S, a weakening economy in China, and a stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards Choice Hotels International, Inc. (NYSE:CHH), and what that likely means for the prospects of the company and its stock.

Choice Hotels International, Inc. (NYSE:CHH) has seen a decrease in hedge fund sentiment in recent months. At the end of this article we will also compare CHH to other stocks including SouFun Holdings Limited (ADR) (NYSE:SFUN), Home Bancshares Inc (NASDAQ:HOMB), and Southwest Gas Corporation (NYSE:SWX) to get a better sense of its popularity.

According to most investors, hedge funds are assumed to be underperforming, old financial tools of yesteryear. While there are more than 8000 funds with their doors open today, We choose to focus on the upper echelon of this group, approximately 700 funds. These money managers command the majority of all hedge funds’ total capital, and by shadowing their best picks, Insider Monkey has spotted numerous investment strategies that have historically defeated the market. Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

With all of this in mind, let’s analyze the key action regarding Choice Hotels International, Inc. (NYSE:CHH).

How have hedgies been trading Choice Hotels International, Inc. (NYSE:CHH)?

At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the second quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Greg Poole’s Echo Street Capital Management has the number one position in Choice Hotels International, Inc. (NYSE:CHH), worth close to $21.1 million, corresponding to 0.8% of its total 13F portfolio. The second most bullish fund manager is Ken Griffin of Citadel Investment Group, with a $19.4 million position; less than 0.1% of its 13F portfolio is allocated to the company. Remaining members of the smart money that hold long positions contain Jim Simons’ Renaissance Technologies, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and D E Shaw.

Because Choice Hotels International, Inc. (NYSE:CHH) has faced a declination in interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of funds that elected to cut their full holdings by the end of the third quarter. Interestingly, Ken Heebner’s Capital Growth Management cut the largest position of the 700 funds followed by Insider Monkey, comprising an estimated $9.7 million in stock, and Peter Muller’s PDT Partners was right behind this move, as the fund cut about $1.6 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 2 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Choice Hotels International, Inc. (NYSE:CHH) but similarly valued. These stocks are SouFun Holdings Limited (ADR) (NYSE:SFUN), Home Bancshares Inc (NASDAQ:HOMB), Southwest Gas Corporation (NYSE:SWX), and Tenneco Inc (NYSE:TEN). All of these stocks’ market caps are closest to CHH’s market cap.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $172 million. That figure was $64 million in CHH’s case. Tenneco Inc (NYSE:TEN) is the most popular stock in this table. On the other hand Southwest Gas Corporation (NYSE:SWX) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Choice Hotels International, Inc. (NYSE:CHH) is as less popular as SWX. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.