Were Hedge Funds Right About Piling Into Darden Restaurants, Inc. (DRI)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Darden Restaurants, Inc. (NYSE:DRI) based on that data and determine whether they were really smart about the stock.

Darden Restaurants, Inc. (NYSE:DRI) was in 52 hedge funds’ portfolios at the end of March. DRI investors should be aware of an increase in support from the world’s most elite money managers in recent months. There were 33 hedge funds in our database with DRI positions at the end of the previous quarter. Our calculations also showed that DRI isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 58 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.

Philippe Laffont of Coatue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to review the fresh hedge fund action regarding Darden Restaurants, Inc. (NYSE:DRI).

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

Heading into the second quarter of 2020, a total of 52 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 58% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in DRI over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Melvin Capital Management was the largest shareholder of Darden Restaurants, Inc. (NYSE:DRI), with a stake worth $175.6 million reported as of the end of September. Trailing Melvin Capital Management was Citadel Investment Group, which amassed a stake valued at $153.9 million. AQR Capital Management, Candlestick Capital Management, and Holocene Advisors 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 Greenvale Capital allocated the biggest weight to Darden Restaurants, Inc. (NYSE:DRI), around 6.08% of its 13F portfolio. Candlestick Capital Management is also relatively very bullish on the stock, designating 3.01 percent of its 13F equity portfolio to DRI.

As industrywide interest jumped, some big names have been driving this bullishness. Melvin Capital Management, managed by Gabriel Plotkin, assembled the most outsized position in Darden Restaurants, Inc. (NYSE:DRI). Melvin Capital Management had $175.6 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also made a $38.2 million investment in the stock during the quarter. The following funds were also among the new DRI investors: Bernard Horn’s Polaris Capital Management, Bruce Emery’s Greenvale Capital, and Anand Parekh’s Alyeska Investment Group.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Darden Restaurants, Inc. (NYSE:DRI) but similarly valued. These stocks are RenaissanceRe Holdings Ltd. (NYSE:RNR), Ionis Pharmaceuticals, Inc. (NASDAQ:IONS), Guardant Health, Inc. (NASDAQ:GH), and Guidewire Software Inc (NYSE:GWRE). This group of stocks’ market values are closest to DRI’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $581 million. That figure was $879 million in DRI’s case. Guidewire Software Inc (NYSE:GWRE) is the most popular stock in this table. On the other hand Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks Darden Restaurants, Inc. (NYSE:DRI) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on DRI as the stock returned 39.1% in Q2 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.