Did Hedge Funds Drop The Ball On Norfolk Southern Corp. (NSC) ?

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first quarter, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first quarter still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Norfolk Southern Corp. (NYSE:NSC) changed recently.

Norfolk Southern Corp. (NYSE:NSC) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 47 hedge funds’ portfolios at the end of the first quarter of 2019. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Occidental Petroleum Corporation (NYSE:OXY), Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG), and General Dynamics Corporation (NYSE:GD) to gather more data points.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

We’re going to take a glance at the new hedge fund action surrounding Norfolk Southern Corp. (NYSE:NSC).

What does the smart money think about Norfolk Southern Corp. (NYSE:NSC)?

Heading into the second quarter of 2019, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NSC over the last 15 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Soroban Capital Partners held the most valuable stake in Norfolk Southern Corp. (NYSE:NSC), which was worth $339.4 million at the end of the first quarter. On the second spot was Citadel Investment Group which amassed $169.6 million worth of shares. Moreover, Palestra Capital Management, Millennium Management, and Impala Asset Management were also bullish on Norfolk Southern Corp. (NYSE:NSC), allocating a large percentage of their portfolios to this stock.

Due to the fact that Norfolk Southern Corp. (NYSE:NSC) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there were a few money managers that slashed their positions entirely by the end of the third quarter. Interestingly, Matt Simon (Citadel)’s Ashler Capital said goodbye to the largest investment of the 700 funds tracked by Insider Monkey, totaling about $98.4 million in stock, and Jim Simons’s Renaissance Technologies was right behind this move, as the fund cut about $75.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Norfolk Southern Corp. (NYSE:NSC) but similarly valued. We will take a look at Occidental Petroleum Corporation (NYSE:OXY), Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG), General Dynamics Corporation (NYSE:GD), and Exelon Corporation (NYSE:EXC). All of these stocks’ market caps are closest to NSC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $2566 million. That figure was $1870 million in NSC’s case. General Dynamics Corporation (NYSE:GD) is the most popular stock in this table. On the other hand Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Norfolk Southern Corp. (NYSE:NSC) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on NSC as the stock returned 6.5% during the same period 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.