Do Hedge Funds Love Air Products & Chemicals, Inc. (APD)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Air Products & Chemicals, Inc. (NYSE:APD) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Air Products & Chemicals, Inc. (NYSE:APD) a buy right now? Hedge funds were taking a pessimistic view. The number of long hedge fund positions shrunk by 4 in recent months. Air Products & Chemicals, Inc. (NYSE:APD) was in 37 hedge funds’ portfolios at the end of June. The all time high for this statistics is 77. Our calculations also showed that APD 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). There were 41 hedge funds in our database with APD holdings at the end of March.

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.

Lee Ainslie of Maverick Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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. 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 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. With all of this in mind we’re going to review the fresh hedge fund action surrounding Air Products & Chemicals, Inc. (NYSE:APD).

What does smart money think about Air Products & Chemicals, Inc. (NYSE:APD)?

Heading into the third quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards APD over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Maverick Capital held the most valuable stake in Air Products & Chemicals, Inc. (NYSE:APD), which was worth $64.2 million at the end of the third quarter. On the second spot was Adage Capital Management which amassed $56.6 million worth of shares. AQR Capital Management, Echo Street Capital Management, and Two Sigma 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 SAYA Management allocated the biggest weight to Air Products & Chemicals, Inc. (NYSE:APD), around 6.28% of its 13F portfolio. Axel Capital Management is also relatively very bullish on the stock, setting aside 1.82 percent of its 13F equity portfolio to APD.

Judging by the fact that Air Products & Chemicals, Inc. (NYSE:APD) has faced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of funds that decided to sell off their entire stakes by the end of the second quarter. At the top of the heap, David Gallo’s Valinor Management LLC dumped the biggest investment of the 750 funds watched by Insider Monkey, totaling close to $41 million in stock, and Javier Velazquez’s Albar Capital was right behind this move, as the fund dumped about $4.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds by the end of the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Air Products & Chemicals, Inc. (NYSE:APD) but similarly valued. We will take a look at 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), Humana Inc (NYSE:HUM), and Northrop Grumman Corporation (NYSE:NOC). This group of stocks’ market values match APD’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.9 hedge funds with bullish positions and the average amount invested in these stocks was $3417 million. That figure was $440 million in APD’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. Air Products & Chemicals, Inc. (NYSE:APD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for APD is 24.5. 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 gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on APD as the stock returned 21% since the end of June and outperformed the market by an even larger margin.

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