CSX Corporation (CSX): Hedge Funds Cashing Out

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards CSX Corporation (NASDAQ:CSX) and determine whether hedge funds skillfully traded this stock.

Is CSX Corporation (NASDAQ:CSX) a healthy stock for your portfolio? The smart money was getting less bullish. The number of bullish hedge fund bets were trimmed by 11 recently. CSX Corporation (NASDAQ:CSX) was in 46 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 63. Our calculations also showed that CSX 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.

Jeffrey Talpins of Element Capital

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. 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 precious metals 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 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. Keeping this in mind we’re going to analyze the recent hedge fund action encompassing CSX Corporation (NASDAQ:CSX).

How have hedgies been trading CSX Corporation (NASDAQ:CSX)?

At Q2’s end, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CSX over the last 20 quarters. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Soroban Capital Partners was the largest shareholder of CSX Corporation (NASDAQ:CSX), with a stake worth $763.5 million reported as of the end of September. Trailing Soroban Capital Partners was Fisher Asset Management, which amassed a stake valued at $307.8 million. Steadfast Capital Management, Palestra 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 Soroban Capital Partners allocated the biggest weight to CSX Corporation (NASDAQ:CSX), around 9.77% of its 13F portfolio. Sunriver Management is also relatively very bullish on the stock, setting aside 6.72 percent of its 13F equity portfolio to CSX.

Because CSX Corporation (NASDAQ:CSX) has experienced bearish sentiment from hedge fund managers, logic holds that there lies a certain “tier” of funds that slashed their full holdings heading into Q3. Intriguingly, Steve Cohen’s Point72 Asset Management cut the biggest stake of the 750 funds followed by Insider Monkey, valued at about $110.5 million in stock. Andreas Halvorsen’s fund, Viking Global, also said goodbye to its stock, about $48.4 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 11 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as CSX Corporation (NASDAQ:CSX) but similarly valued. We will take a look at Air Products & Chemicals, Inc. (NYSE:APD), Vale SA (NYSE:VALE), The Sherwin-Williams Company (NYSE:SHW), Autodesk, Inc. (NASDAQ:ADSK), Brookfield Asset Management Inc. (NYSE:BAM), Moody’s Corporation (NYSE:MCO), and Humana Inc (NYSE:HUM). All of these stocks’ market caps are closest to CSX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.4 hedge funds with bullish positions and the average amount invested in these stocks was $3338 million. That figure was $2291 million in CSX’s case. Humana Inc (NYSE:HUM) is the most popular stock in this table. On the other hand Vale SA (NYSE:VALE) is the least popular one with only 29 bullish hedge fund positions. CSX Corporation (NASDAQ:CSX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CSX is 35.2. 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. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately CSX wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CSX investors were disappointed as the stock returned 10% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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