Delta Air Lines, Inc. (DAL): Smart Money Holding Firm to Conviction in Airline

At Insider Monkey, we track more than 800 hedge funds (about 786 of which filed Form 13Fs this quarter) and measure the performance of their long stock picks in real time. Data from eVestment shows that concerned investors have been pulling some of their capital from hedge funds recently, dropping their collective assets under management to under $3 trillion for the first time since May 2014. Part of this is due to the media piling ruthlessly on hedge funds over the past year and “celebrating” the large losses of hedge fund titans like Bill Ackman. However, while 2015 was undoubtedly a difficult one for the industry, our data shows that hedge funds’ stock picks are outperforming the market so far in 2016, topping the S&P 500 Total Return Index by 50 basis points and the Russell 2000 Index by 410 basis points during the first two months of this year. So on average, it is a good idea to pay attention to what hedge funds are doing. Keeping this in mind, let’s take a look at the hedge fund activity in Delta Air Lines, Inc. (NYSE:DAL) during the fourth quarter. At the end of this article we will also compare DAL to other stocks including Caterpillar Inc. (NYSE:CAT), ABB Ltd (ADR) (NYSE:ABB), and Automatic Data Processing (NASDAQ:ADP) to get a better sense of its popularity relative to some of its market cap peers.

Delta Air Lines, Inc. (NYSE:DAL) was in 108 hedge funds’ portfolios at the end of December. That figure represented a marginal decrease of one fund from the end of September. On the other hand, the collective value of those investors’ holdings rose by about $537 million to $7.86 billion. Having 108 investors with long positions in the stock ranked Delta Air Lines as the tenth-most popular stock among the investors in our database and by far the most popular airline (American Airlines Group Inc (NASDAQ:AAL) was next with 76).

Why do top investors like Delta Air Lines? For starters, the company’s profit and margins have soared as oil prices have faded, with its EBITDA margin rising by 3 percentage points to 21% in 2015, while adjusted EPS hit $1.18 in the fourth quarter, up by more than 50% year-over-year. The growing profit is allowing Delta and some of the other major airlines to put the squeeze on low-cost carriers by improving their service without hiking their fees. Despite a strong three-year run that has seen its stock appreciate by over 225%, Delta Air Lines is also extremely cheap from a valuation perspective, trading at a P/E of just 8.65. While AAL and United Continental Holdings Inc (NYSE:UAL) have even lower P/E ratios, both of those companies suffered revenue declines in 2015, while Delta posted a small revenue increase. AAL and UAL also had smaller growth than Delta in terms of traffic and capacity growth. Those factors may be why Delta is the only airline stock with a unanimous ‘Buy’ rating among analysts as well as having the largest return potential of any airline stock based on those analysts’ average target price in comparison to the actual price of the stock.

Keeping this in mind, we’re going to analyze the key hedge fund action regarding Delta Air Lines, Inc. (NYSE:DAL) on the next page.

How are hedge funds trading Delta Air Lines, Inc. (NYSE:DAL)?

Heading into 2016, a total of 108 of the hedge funds tracked by Insider Monkey were long this stock, a 1% dip from one quarter earlier. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings substantially (or had already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Lansdowne Partners, managed by Alex Snow, holds the number one position in Delta Air Lines, Inc. (NYSE:DAL). Lansdowne Partners has a $1.32 billion position in the stock, comprising 9.1% of its 13F portfolio. The second most bullish fund manager is Paul Reeder and Edward Shapiro of PAR Capital Management, with a $776.4 million position; 14.3% of its 13F portfolio is allocated to the stock. Some other peers that hold long positions include David Cohen and Harold Levy’s Iridian Asset Management, David Tepper’s Appaloosa Management LP, and Daniel S. Och’s OZ Management.

Due to the fact that Delta Air Lines, Inc. (NYSE:DAL) experienced falling interest from hedge fund managers, it’s easy to see that there was a specific group of money managers who were dropping their entire stakes last quarter. It’s worth mentioning that James Dinan’s York Capital Management dumped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, valued at about $46.7 million in call options underlying Delta shares, while Mike Masters’ Masters Capital Management was right behind this move, as the fund said goodbye to about $44.9 million worth of shares. These transactions are interesting, as aggregate hedge fund interest dropped by 1 fund last quarter.

Let’s check out hedge fund activity in other stocks similar to Delta Air Lines, Inc. (NYSE:DAL). These stocks are Caterpillar Inc. (NYSE:CAT), ABB Ltd (ADR) (NYSE:ABB), Automatic Data Processing (NASDAQ:ADP), and LyondellBasell Industries NV (NYSE:LYB). This group of stocks’ market caps resemble DAL’s market cap.

As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $1.29 billion. That figure was $7.86 million in DAL’s case. LyondellBasell Industries NV (NYSE:LYB) is the most popular stock in this table. On the other hand ABB Ltd (ADR) (NYSE:ABB) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Delta Air Lines, Inc. (NYSE:DAL) is more popular among hedge funds. Considering that hedge funds are very fond of this stock in relation to its market cap peers, and that analysts are also in unanimous agreement about its potential, it may be a good idea to analyze it in further detail and potentially include it in your portfolio.