How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Brinker International, Inc. (NYSE:EAT) and determine whether hedge funds had an edge regarding this stock.
Brinker International, Inc. (NYSE:EAT) was in 27 hedge funds' portfolios at the end of June. The all time high for this statistics is 29. EAT has experienced an increase in activity from the world's largest hedge funds in recent months. There were 16 hedge funds in our database with EAT positions at the end of the first quarter. Our calculations also showed that EAT 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.
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 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 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.
Bruce Kovner of Caxton Associates LP
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. Now let's go over the recent hedge fund action surrounding Brinker International, Inc. (NYSE:EAT).
What does smart money think about Brinker International, Inc. (NYSE:EAT)?
At second quarter's end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 69% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in EAT a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Among these funds, Samlyn Capital held the most valuable stake in Brinker International, Inc. (NYSE:EAT), which was worth $70.3 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $53.9 million worth of shares. Sylebra Capital Management, Arrowstreet Capital, and Millennium 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 DG Capital Management allocated the biggest weight to Brinker International, Inc. (NYSE:EAT), around 3.88% of its 13F portfolio. Diametric Capital is also relatively very bullish on the stock, designating 3.62 percent of its 13F equity portfolio to EAT.
As aggregate interest increased, some big names were leading the bulls' herd. Samlyn Capital, managed by Robert Pohly, initiated the most outsized position in Brinker International, Inc. (NYSE:EAT). Samlyn Capital had $70.3 million invested in the company at the end of the quarter. Daniel Patrick Gibson's Sylebra Capital Management also made a $35.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Clint Carlson's Carlson Capital, George Soros's Soros Fund Management, and Steve Cohen's Point72 Asset Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Brinker International, Inc. (NYSE:EAT) but similarly valued. These stocks are Fanhua Inc. (NASDAQ:FANH), BioXcel Therapeutics, Inc. (NASDAQ:BTAI), Opera Limited (NASDAQ:OPRA), OceanFirst Financial Corp. (NASDAQ:OCFC), Omega Flex, Inc. (NASDAQ:OFLX), Encore Capital Group, Inc. (NASDAQ:ECPG), and Genetron Holdings Limited (NASDAQ:GTH). This group of stocks' market valuations are similar to EAT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FANH,4,3438,-1 BTAI,13,99964,3 OPRA,5,8672,-1 OCFC,10,36785,1 OFLX,4,4715,1 ECPG,17,90970,2 GTH,16,124186,16 Average,9.9,52676,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.9 hedge funds with bullish positions and the average amount invested in these stocks was $53 million. That figure was $278 million in EAT's case. Encore Capital Group, Inc. (NASDAQ:ECPG) is the most popular stock in this table. On the other hand Fanhua Inc. (NASDAQ:FANH) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Brinker International, Inc. (NYSE:EAT) is more popular among hedge funds. Our overall hedge fund sentiment score for EAT is 87.9. 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 21.3% in 2020 through September 25th but still managed to beat the market by 17.7 percentage points. Hedge funds were also right about betting on EAT as the stock returned 87.2% since the end of June 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.
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Disclosure: None. This article was originally published at Insider Monkey.