Was The Smart Money Right About Darden Restaurants, Inc. (DRI)?

Keeping this in mind, let’s analyze whether Darden Restaurants, Inc. (NYSE:DRI) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Darden Restaurants, Inc. (NYSE:DRI) was in 49 hedge funds’ portfolios at the end of June. The all time high for this statistics is 52. DRI shareholders have witnessed a decrease in support from the world’s most elite money managers lately. There were 52 hedge funds in our database with DRI positions at the end of the first quarter. Our calculations also showed that DRI isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 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.

Scott Ferguson of Sachem Head Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best high dividend stocks to buy to identify solid dividend stocks trading at rock bottom prices. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s go over the latest hedge fund action encompassing Darden Restaurants, Inc. (NYSE:DRI).

What does smart money think about Darden Restaurants, Inc. (NYSE:DRI)?

Heading into the third quarter of 2020, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 24 hedge funds with a bullish position in DRI a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Andreas Halvorsen’s Viking Global has the number one position in Darden Restaurants, Inc. (NYSE:DRI), worth close to $226.7 million, corresponding to 1% of its total 13F portfolio. The second most bullish fund manager is Melvin Capital Management, managed by Gabriel Plotkin, which holds a $75.8 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining peers with similar optimism include Cliff Asness’s AQR Capital Management, Steve Cohen’s Point72 Asset Management and George Soros’s Soros Fund Management. In terms of the portfolio weights assigned to each position Greenvale Capital allocated the biggest weight to Darden Restaurants, Inc. (NYSE:DRI), around 8.17% of its 13F portfolio. Sachem Head Capital is also relatively very bullish on the stock, setting aside 3.56 percent of its 13F equity portfolio to DRI.

Due to the fact that Darden Restaurants, Inc. (NYSE:DRI) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedge funds who sold off their positions entirely heading into Q3. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dumped the largest position of all the hedgies followed by Insider Monkey, worth close to $38.2 million in stock. Anand Parekh’s fund, Alyeska Investment Group, also sold off its stock, about $21.5 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 3 funds heading into Q3.

Let’s go over hedge fund activity in other stocks similar to Darden Restaurants, Inc. (NYSE:DRI). These stocks are HubSpot Inc (NYSE:HUBS), Avantor, Inc. (NYSE:AVTR), Qiagen NV (NYSE:QGEN), China Southern Airlines Co Ltd (NYSE:ZNH), RPM International Inc. (NYSE:RPM), The Carlyle Group Inc. (NASDAQ:CG), and Magellan Midstream Partners, L.P. (NYSE:MMP). This group of stocks’ market valuations resemble DRI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.6 hedge funds with bullish positions and the average amount invested in these stocks was $359 million. That figure was $1203 million in DRI’s case. HubSpot Inc (NYSE:HUBS) is the most popular stock in this table. On the other hand China Southern Airlines Co Ltd (NYSE:ZNH) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Darden Restaurants, Inc. (NYSE:DRI) is more popular among hedge funds. Our overall hedge fund sentiment score for DRI is 80.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on DRI as the stock returned 31.7% since the end of June (through 10/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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